What Mad Men teaches us about dealing with market crashes

Mad Men is a television series set in the fictional Madison Avenue advertising agency Sterling Cooper (later Sterling Cooper Draper Payne and Sterling Cooper and Partners), during the 1960s. The main character is Donald Draper (played by Jon Hamm, pictured), a charismatic, talented, but self-destructive creative director. It ran over seven seasons, from 2007 to 2015, and was critically lauded, winning 16 Emmy Awards as well as five Golden Globes.

The key moment

In the fourth episode of the first season, New Amsterdam, the two main partners, Bert Cooper and Roger Sterling, talk to Don about Peter Campbell, a rather arrogant and entitled junior account manager. Cooper notes that Peter’s family used to be extremely wealthy, owning “pretty much everything north of 125th Street”. However, Peter’s grandfather panicked and sold the family’s real-estate empire in the aftermath of the Wall Street Crash in 1929. Thanks to this bad decision the blue-blooded Campbell must suffer the “indignity” of having to work for a living.

The lesson for investors

In the aftermath of the Wall Street Crash many stockmarket investors followed the example of Peter’s grandfather and not only dumped their shares, but also permanently moved into low-yielding assets, such as bonds. This meant that they missed out on the eventual recovery as well as the post-war boom. Even those who bought their shares at the peak of the market in 1929 would have substantially beaten both inflation and bonds over the next three decades. Overall, the evidence suggest that in the long run stockmarkets tend to revert to the mean, so that a bad year is more likely to be followed by a good year.

Other financial wisdom

While permanently avoiding shares after a market decline is a bad idea, temporarily dumping shares that are falling in price can be a good trading strategy. This is because in the short run share prices (and the market as a whole) exhibit price momentum (ie, if a stock rises it is more likely to keep rising). Selling in December 1929, and not returning until June 1932, would have saved you a lot of money. The problem is that constantly trading in and out of shares can generate high trading costs (as well as additional taxes in some cases).