Two Truths and a Take, Bonus Episode: Season 1, Episode 30b
|Nov 10||Public post|| 2|
In this month’s interview special, I’m delighted to have Jamie Catherwood come on the newsletter and share some pearls of wisdom from financial history.
Jamie has a remarkable interest and gift for explaining the present through the lens of the past. I think his favourite phrase is “We’ve been here before”: true for all walks of life, but especially in finance. (I suspect his second favourite has something to do with his beloved Tottenham Hotspur, VAR, or something in that universe.)
Like the last few interview guests on the newsletter, I met Jamie on Twitter (of course) where I first encountered his astonishingly high-quality writing in the wild. Since then, Jamie has gone pro: he’s joined Financial Twitter heavyweight O’Shaughnessy Asset Management, and launched a weekly newsletter called Investor Amnesia that I recommend you join immediately.
Please enjoy this conversation with Jamie; I had a lot of fun reading through it and you will too:
Let’s start out with a banger. Who is your favourite villain in financial history?
Oh man. There are so many candidates, but it has to be Gregor MacGregor, better known as ‘Serene Highness Gregor the First, Sovereign Prince of the State of Poyais and its Dependencies, and Cacique of the Poyer Nation’. Rolls of the tongue, right?
I wrote about his fascinating story in more detail here, but essentially MacGregor was sailing around Central America when he discovered an uninhabited island, which he named ‘Poyais’. The island was a total jungle with no signs of civilization, but MacGregor returned home to Scotland with wild claims of a new paradise called Poyais. He launched a full-scale marketing campaign, which included publishing a book on the incredible opportunities available to both investors and settlers in Poyais. Offices were opened in London and Scotland, where interested parties could purchase plots of Poyais land for 4 shillings an acre.
Yet, MacGregor was still not satisfied. The Sovereign Prince of Poyais issued debt worth $3.6 Billion today, which boasted a 6% yield, and was snapped up by investors. Sadly, many older Scots packed up their lives to embark on the treacherous journey to their newly purchased homes on Poyais. However, it was all a lie. There were no buildings, ports, or people on Poyais. There was no utopia. Only jungle.
In total, seven ships arrived in Poyais holding passengers looking to settle in MacGregor’s paradise. Of the 240 settlers that arrived, only 60 survived.
On the flip side: who is your favourite unsung hero, who invented or accomplished something critically important but that none of us have ever heard of?
The founder of Nomura, Tokushichi Nomura II, had a fascinating life. He founded the firm in the early 1900s, and built the firm from the ground up to what it is today. The business strategies, philosophy, and tactics that he employed were incredible. I think the below passage from House of Nomura will sum it up better than I ever could:
“Nomura sat back as the price [of Fukushima Bosek] rose each day, hitting thirty-five, then forty, forty-five, fifty. By the end of 1905 the price of Fukushima Bosek had rocketed fourfold to 100 yen and Nomura had earned on paper the 20,000 yen he had borrowed from his father earlier. He sold a few shares in the market on the way up but was so thrilled with his first stock-market killing that he kept most of his shares as a long-term investment. He refused to part with his holding even later when he became rich and famous. Nomura group companies have adhered to the wish of their founding father, so that in the 1990s, over eight decades after Tokushichi Nomura purchased his first investment, they retain a 15 per cent stake in that same textile company, now known as Shikibo. And, as if to symbolize the Nomura group's bond with Shikibo, a distant relative of Tokushichi Nomura II reigns as president.”
On a more humorous note, he also implemented clever tricks as the firm expanded its brokerage division. In 1906, for example, Nomura hired a “woman with a seductive manner” to handle the switchboard and phone calls, believing she would “encourage his male clients to place orders”. Pretty sly, huh?
The depth of your knowledge of this stuff is remarkable. Where do you find your source material?
That’s very kind of you to say, but I just enjoy reading old books!! As far as research goes, there is a lot of un-sexy google searching, and opening a million Chrome tabs. I enjoy the hunt, and there aren’t many dedicated financial history sites. Apart from Investoramnesia.com, that is 😉. In general though, NBER and Archive.org are incredible resources. NBER for articles written by historians, and Archive.org for original sources dating back to the 1600s and earlier!
What have been some of the best predictions in the history of finance? Who called things absolutely right years before anyone believed them, like Jack Bogle with indexing, for instance? Who else should we know of who has acted with that kind of foresight and conviction, and got it right?
Going back to Nomura, he made a killing in the 1905 Japanese bull market, but then sold all his stocks at a profit to fund his new short on Japanese stocks, thinking they were overvalued. For a while, he was hemorrhaging money, and was forced to hide under his desk as creditors came demanding their margin calls. Eventually he was proven right, though, as the market plummeted 88% over the course of three months.
These days, one big topic on everybody’s minds is low interest rates, culminating in all of this negative-yielding debt that’s both curious and depressing to think about. What are some good stories or periods from financial history that echo what’s going on today and that people ought to know about?
I wrote an article about the rise of private credit strategies in recent years, as institutional investors search for yield in a low interest rate environment. I found a comparison in late 19th century Britain, where consol rates (British Govt bonds) offered historically low yields, and investors poured capital into new funds investing in higher yielding bonds within Her Majesty’s Empire. With consols yielding 2.21%, bonds in places like Nova Scotia offering 5.81% were very attractive.
Also, there was no need to worry about covenant-lite agreements, or default, since the British Empire always got their money! In one instance, when a colony was late on their debt payments, Prime Minister Palmerston was quoted:
“The patience and forbearance of His Majesty’s government…have reached their limit, and if the sums due to the British…claimants are not paid… His Majesty’s Admiral commanding on the West India Station will receive orders to take such measures as may be necessary to obtain justice.”
What is something that everybody simply knows to be true about the history of finance, but we're all wrong?
The problem stems from Charles Mackay’s popular 1841 book, Extraordinary Popular Delusions and the Madness of Crowds. Much of his book was based on terrible sources, which has led to a global misunderstanding of what happened. In short, Mackay’s descriptions of people going bankrupt from trading tulips, or drowning themselves in canals were all based off satirical pamphlets intentionally exaggerating the events of Tulip ‘Mania’.
THANK YOU for bringing this up - it really bugs me that the Tulip Bubble story has had such staying power - especially given there are such better bubble stories out there. But it seems like it’s just “become true”; if enough people believe in it, it just becomes a part of financial lore. Why do people cling to this story so much? Is it because Tulips are inherently easier to understand as a speculative object than, say, Mississippi Company shares? Or is it something else?
I knew I liked you, Alex! I am very happy to hear that you’ve avoided being sucked in by the Tulip Bubble story. I think you’re exactly right. You don’t need to have any financial acumen or brilliant insights to understand that the notion of flowers being traded for houses is categorically insane. Consequently, it’s the go-to comparison for any type of new ‘hot asset’ that one might think is stupid. I believe that’s why everyone started comparing the Bitcoin rally in 2017 to the Tulip bubble. Traditional financial pundits who think Bitcoin is useless just thought ‘What other stupid bubbles have there been in history? Ah, Tulips!’. It’s an overly simplified argument based on shoddy evidence.
Keeping on the topic of bubbles- what is your favourite bubble-related story? Any story; just one that newsletter readers haven’t heard and that is a banger.
Well, suffice it to say that there are no shortage of options to select from! I am hesitant to commit to any one bubble story being my favorite, but the ‘Rubber Boom’ in early 20th century London is a great one! I wrote more about the bubble here, but essentially the price of rubber boomed in 1910 as a large rubber plantation in Brazil was closed down, reducing supply.
In response, promoters and speculators did what they do best, and set up sketchy ‘Rubber Plantation Companies’, and sold shares to speculators in London. I mean, there was one prospectus that offered buyers the ‘secrets to the company’ for only £50,000! There were examples of other companies where “raw stumps were stuck into the ground and described as one year’s rubber”.
What I found most fascinating about this bubble was that it literally refuted basic concepts of supply and demand. With every rubber plantation company that came on the market, the price of rubber should have dropped, since this meant more supply coming onto the market. Instead, it continued going up. The Economist pointed out as much in an article at the time:
“The first thought that arises at sight of these figures is ‘How can the price of rubber be maintained if nine of the older companies are increasing their output at the rate of nearly 100% per annum, and new companies are being started every week to put still more rubber on to the market?’ The answer, of course, is that rubber will not stay at its present price…the only question is how long it will take”
Inevitably, however, the price of Rubber plummeted in April 1910, and sensibility was restored to the markets. Only temporarily, of course!
In one of my favourite history of finance books, Once in Golconda, there’s a really entertaining section all about how all sorts of sneaky trading activity that’s forbidden today - wash trading, pump and dumps, tape painting, spoofing - used to be common, legal practice that you’d expect to encounter on major stock exchanges. Over the course of the 20th century, we cleaned things up and you didn’t see them so much anymore. But then some new development, often a technological one, lets them back in. So HFT brought back spoofing in a big way; crypto reintroduced all kinds of garbage. My question for you is: what is your favourite sneaky financial practice from history, and how might it come back?
A few examples immediately spring to mind, but I’ll give you my favorite. Daniel Drew called this the ‘handkerchief trick’ in the 19th century, but it was also used by traders on the Amsterdam exchange two centuries before him. The fact that this trick lasted over two hundred years is a testament to the fact that human nature never changes. I mean, traders fell for the same trick for two centuries! Just read the excerpts below:
1688: “If it is of importance to spread a piece of news which has been invented by the speculators themselves, they have a letter written and [arrange to have] the letter dropped as if by chance at the right spot. The finder believes himself to possess a treasure, whereas he has really received a letter of Uriah which will lead him into ruin.”
1891: “He [Daniel Drew] watched for his opportunity, and one evening as several of them [speculators] were enjoying themselves in an uptown club, Uncle Daniel walked in, sans ceremonie. He appeared to be looking after some man, and though invited to remain, seemed to be in a great hurry to get away, and was apparently excited and warm. He seemed to have something important on hand. He drew a big white handkerchief out of his pocket a few times and wiped the perspiration from his heated brow. When he was about to depart, there came out of his pocket with the handkerchief a small slip of white paper which floated around apparently unseen by him and alighted at the feet of one of the bystanders, who quickly set his foot upon it. When Mr. Drew made bis exit, the white scrap of paper was instantly scanned. It contained these ominous words in his own handwriting: "Buy me all the Oshkosh stock you can at any price you can get it below par."
Here was a speculative revelation for the boys, for everybody believed at the time that Oshkosh had already gone too high, and the point had been circulated to sell it ‘short’. The mysterious words written on this erratic slip of paper, however, convinced these operators that there must be a new deal to give Oshkosh another ''kiting." There was no time to be lost in taking advantage of the unexpected and highly valuable information. They formed a pool to purchase 30,000 shares the next day. They bought the stock according to pre-arrangement, and a new broker of Daniel Drew’s was the man who sold it to them· They only discovered how badly they themselves had been sold by Mr. Drew's handkerchief trick when Oshkosh began to decline at the rate of a dozen points a day, and Uncle Daniel soon raked in from the jokers and their friends more than he had lost in Northwest.”
Investing isn’t supposed to be easy, and psychologically speaking it’s a lot easier to go broke fast than get rich slow. Fortunately, the profession of asset managers and financial advisers (for better or for worse) is here to help. You’ve been working hard at OSAM for the last few months on a product called Canvas, and I have to ask: how do you think modern technology has impacted our sense of investor amnesia, as you call it? How does Canvas help?
As our Chairman and Co-CIO Jim O’Shaughnessy likes to say, ‘human nature is the last arbitrage.’ One of the easiest ways to mitigate the risk of ‘investor amnesia’ is to remove the human element from the investment process. If your strategies and investment philosophy are rooted in robust empirical evidence and quantitative models, you’ve eliminated the possibility of a portfolio manager getting swept away by the latest fad or narrative. Everything we do at OSAM is based on data, not narrative.
We believe that Canvas is a helpful tool for a range of issues, but to your specific point about ‘investor amnesia’, the Canvas platform is a powerful example of the ‘Ikea effect’, a cognitive bias that can actually help investors. Studies show that people place a much higher value on products that they partially created. For example, you feel a stronger attachment to the Ikea table you bought that took 3 hours to assemble yourself.
Since Canvas allows advisers to build deeply customizable strategies with clients that are tailored to address their individual needs and preferences (ESG preferences, tax status, restricting industries, sectors, specific stocks, etc.), we believe that clients are more likely to stick with their portfolios during hard times, since they helped ‘build’ the portfolio.
And finally, what are some book, blog, newsletter, or other reading recommendations that you can suggest? Your newsletter, Investor Amnesia, is like a firehose of fascinating content - if you had to pick two or three favourites that are on your mind right now, who or what would you urge us to go read next?
Well thank you, Alex! Coming from a newsletter expert like yourself, that means a lot. I would definitely encourage people to subscribe if they are at all interested in financial history. In addition to that, I’d recommend Adam Collins’ blog at Movement Capital, and for books, I’ve recently enjoyed Dopesick and Rise and Kill First: The Secret History of Israel's Targeted Assassinations. As far as Financial History books go, I put together a list here.
Thank you so much to Jamie for the time, the thoughtful answers, and the timeless wisdom!
If you’ve enjoyed this interview, watch for another one of Jamie’s initiatives in your area: recurring organized meetups. They’re for anybody who either actively participates or lurks around Finance Twitter, or works in any related field, or is curious and wants to hang out. There are currently meetups happening in DC, Chicago, LA, New York, Philly, Toronto, and Atlanta - if you’re in one of those areas, please reach out to whoever’s listed and join up the next time one takes place!
Don’t forget to subscribe to Investor Amnesia, also in your inbox every Sunday just like this one.