I just read Andrew Ross Sorkin’s latest book, 1929: The Inside Story of the Greatest Crash in Wall Street History.

Sorkin spent nearly a decade doing a deep dive into facts about the events leading to the 1929 stock market crash and the Great Depression that followed.

The book highlights key historical figures and institutions, and their roles in the crash that changed the lives of millions and our financial landscape.

I highly recommend this book for those of you who hope to better understand what occurred a century ago and think about lessons that might be learned from it.

Sorkin draws cautionary comparisons between the late 1920s and the present that I find compelling.

Here are some interesting facts that might be worth remembering:

Bubbles

The stock market saw an incredible rise in the Roaring Twenties, some seemingly deserved with new technologies that built companies like General Electric, General Motors, Westinghouse, RCA and the big banks.

The Dow Jones Industrial Average saw a six-fold increase from 1924 to 1929, rising from 72 in 1920 and closing at 381 on Sept. 3, 1929.

The promise of getting rich quickly drew in millions of retail customers with Wall Street’s sales force busy signing up new customers who had almost no experience in the financial markets and very little money — with promises of big gains in an ever-rising stock market.

But the bubble burst and the Dow closed at 65 in 1932, wiping out millions of investors, banks and companies. It took decades to return to its 1929 high.

Margin Loans

Following the success of lending for folks to buy cars and appliances, Wall Street and big banks decided that people could borrow to buy stocks — with just 10% down.

Think about that: a novice investor could buy $100 of stock with just $10 down. If the stock went up just 10%, the investor would have a 100% return on his cash.

As you can see from the nearby chart, the stock market was going up like a rocket in the 1920s, so lenders made money and investors made money.

Ah, the joys of leverage.

So, what could go wrong? Well, the outsized gains from margins in a rising market create outsized losses in a declining market.

With a 90% margin, even a modest decline triggered “margin calls” — and with the steep declines as panic selling hit in late 1929, millions of investors lost their savings and even their homes.

The domino effect from these losses were a leading cause of the Great Depression.

Banking and Brokerage

The 1920s saw close connections between commercial banks that took in deposits and made loans and brokerage firms that underwrote and traded securities.

In many cases, there was common ownership and overlapping directorship. Banks took on increasing levels of risk with big loans to securities firms and investors.

As stock markets collapsed, banks around the country failed, and panic “runs” on even the most well-capitalized banks struggled to survive.

Tariffs

In June 1930, the Smoot-Hawley Tariff Act was signed into law. It raised U.S. tariffs on more than 20,000 imported goods to protect American farmers and manufactures during the Great Depression.

However, the act triggered retaliatory tariffs from other countries, which caused a collapse in global trade that led to a dramatic drop in U.S. exports and imports.

The act is widely considered to have worsened the economic conditions of the Great Depression.

Psychology

Sorkin’s book provides a powerful reminder of how psychology drives markets. I have written on several occasions about the power of greed and fear when investing, and this was demonstrated in spades in the book.

During the 1920s, collective speculation and herd mentality led investors — both experienced and novice — to chase unsustainable returns, only to see panic levels of fear cause markets to collapse.

I am reminded of Mark Twain’s quote about history not exactly repeating itself but certainly rhyming. It’s hard not to find parallels between what happened a century ago and today.

Concerns about speculative bubbles driven by artificial intelligence, crypto and private equity/debt — and blurred regulatory oversight of banks and brokerage firms — are eerily similar.

Fortunately, there are some safeguards today that did not exist in the 1920s, including 50% margin loan limits, FDIC protection on bank accounts, and a more experienced Federal Reserve with stronger capital requirements for banks.

However, the Glass-Steagall Act that separated commercial banks and investment banking to protect against the excesses of the 1920s was repealed in 1999, allowing for their mergers.

During the Great Recession of 2007-2009, we saw “forced marriages” of firms like Bank of America/Merrill Lynch and JP Morgan/Bear Stearns with major brokerage firms like Goldman Sachs and Morgan Stanley becoming bank holding companies.

And there is certainly no shortage of human emotion in markets, with FOMO (fear of missing out) and FOBI (fear of being in) as strong as ever.

Here are some practical takeaways for investors:

• Learn from history — markets can be very volatile. Risk taking is part of investing, but balance ambition with prudence.
• Understand the math of margins — avoid excessive leverage.
• Diversification is the primary strategy for reducing risk.
• Try to control your emotions — they are not your friends.

Perhaps most important, have a well thought-out investment plan that is consistent with your goals, time horizon and risk tolerance.

Remember, the law of economics argues that seeking the highest potential return comes with the highest potential risk.

For me (and many baby-boomers), getting solid current income, some growth to offset the impact of inflation and lower volatility makes sense — and helps with getting a good sleep each night.

The Los Angeles Dodgers’ recent World Series win provides a good analogy with a strategy of great defense combined with an offense based on a steady stream of singles and doubles plus an occasional home run.

And once you have a solid strategy, stick with it. It turns out the “sticking” is what pays off best.