Lesson 7 of 7
What every crash had in common
Six episodes, one recurring shape: leverage, a story that justified any price, forced sellers, and a recovery that only pays whoever was not forced out.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- Most of these episodes ran on borrowed money, a story that seemed to justify any price, or both; 2020 began with an outside shock.
- A falling price becomes a forced sale for whoever borrowed to buy, must meet a redemption, or runs a rule that sells more as prices drop.
- Compounded over sixty-one years, a long-run gain this large is paid only to whoever was still holding through every one of the falls along the way.
Six episodes, most sharing one recurring shape. Each ran on leverage, a story that made the price look justified, or both, and each turned a falling price into a forced sale for someone. The long-run gain in the chart below belongs only to whoever was not that someone.
$1 invested in 1965, compounded through every year on this table
- $1 invested in 1965
Show the numbers
| $1 invested in 1965 | |
|---|---|
| 1965 | $1.10 |
| 1966 | $0.97 |
| 1967 | $1.27 |
| 1968 | $1.41 |
| 1969 | $1.29 |
| 1970 | $1.34 |
| 1971 | $1.54 |
| 1972 | $1.83 |
| 1973 | $1.56 |
| 1974 | $1.15 |
| 1975 | $1.57 |
| 1976 | $1.95 |
| 1977 | $1.80 |
| 1978 | $1.92 |
| 1979 | $2.27 |
| 1980 | $3.00 |
| 1981 | $2.85 |
| 1982 | $3.46 |
| 1983 | $4.23 |
| 1984 | $4.49 |
| 1985 | $5.91 |
| 1986 | $7.01 |
| 1987 | $7.37 |
| 1988 | $8.59 |
| 1989 | $11.31 |
| 1990 | $10.96 |
| 1991 | $14.31 |
| 1992 | $15.39 |
| 1993 | $16.95 |
| 1994 | $17.17 |
| 1995 | $23.62 |
| 1996 | $29.06 |
| 1997 | $38.76 |
| 1998 | $49.85 |
| 1999 | $60.32 |
| 2000 | $54.83 |
| 2001 | $48.30 |
| 2002 | $37.63 |
| 2003 | $48.43 |
| 2004 | $53.71 |
| 2005 | $56.34 |
| 2006 | $65.24 |
| 2007 | $68.83 |
| 2008 | $43.36 |
| 2009 | $54.85 |
| 2010 | $63.13 |
| 2011 | $64.46 |
| 2012 | $74.77 |
| 2013 | $99.00 |
| 2014 | $112.56 |
| 2015 | $114.14 |
| 2016 | $127.83 |
| 2017 | $155.70 |
| 2018 | $148.85 |
| 2019 | $195.74 |
| 2020 | $231.76 |
| 2021 | $298.27 |
| 2022 | $244.28 |
| 2023 | $308.53 |
| 2024 | $385.66 |
| 2025 | $454.69 |
A story that justified any price
In 1929 it was a "new era" of permanent prosperity, bought partly on margin. In 1973-74 it was that a good enough company earned any multiple. In the dot-com years it was that revenue growth mattered more than profit. In 2008 it was that mortgage assets, in aggregate, could not all fall together. Each story explained why the usual arithmetic did not apply this time. In every case it turned out to apply after all.
Forced selling decides who is out
Forced selling runs under most of these episodes: margin calls in 1929, portfolio insurance selling by rule in 1987, banks levered ten and more to one in 2008, margin calls and redemptions in 2020. Leverage is its commonest cause. It does not make a price fall; it decides who must sell once it does, converting a paper loss into a realised one at the worst possible moment.
The recovery only pays who was left holding
Compounding the table's rounded annual figures this way runs the $1 up to about $455 by 2025. The table itself states an overall gain of 46,061 percent, about 462 times. The two differ by about 1.5 percent, and the table does not say how it computed its total, so quote the table's figure.
What Kindleberger's shape adds
Kindleberger, building on Minsky's model, describes a recurring shape behind episodes like these: some new development displaces the old consensus, credit expands to chase it, euphoria sets in, then distress and a rush for the exit follow. Marks argues in Mastering the Market Cycle that excess in one direction creates the correction in the other. The useful question is where in the cycle you stand, not what happens next.
Check yourself
What did leverage do in most of these episodes, more than causing the price to fall?
- It made the story more believable
- It decided who was forced to sell once the price fell
- It guaranteed a faster recovery
Show the answer
Answer: B.
Leverage converts a paper loss into a forced, realised one. The price fall itself usually had other causes; leverage decided who could not wait it out.Compounding the table's rounded yearly returns gives about $455. The table states 46,061 percent. Which should you quote as the total?
- The $455, because it is computed
- The table's own 46,061 percent
- Neither, because they disagree
Show the answer
Answer: B.
The table's total is the published figure. A total rebuilt from rounded yearly figures is an approximation.In Kindleberger's shape for a mania, what typically follows euphoria?
- A permanently higher plateau, with no further cycle
- Distress, and then a rush for the exit
- An immediate and full recovery
Show the answer
Answer: B.
The shape runs displacement, credit expansion, euphoria, then distress and revulsion. Euphoria is the middle of the pattern, not its end.Sources
- Berkshire Hathaway 2025 annual report, table "Berkshire's Performance vs. the S&P 500": S&P 500 with dividends, by calendar year, 1965 to 2025, compounded 10.5 percent a year, overall gain 46,061 percent.
- Kindleberger, Manias, Panics and Crashes, first published 1978, building on Minsky's model of financial instability.
- Marks, Mastering the Market Cycle, 2018.
- Fisher, Common Stocks and Uncommon Profits and Other Writings, on the "new era" belief and margin buying ahead of 1929.
What this leaves out
- The line is in nominal dollars, before fees and taxes; the table's 1965 and 1966 end on 30 September and its 1967 covers 15 months.
- The $455 line is rebuilt from rounded yearly figures; the total to quote is the table's 46,061 percent.
- Nothing here says where any market stands today, or when a cycle will turn. It is not advice about any security.