Devil Take the Hindmost

Devil Take the Hindmost: A History of Financial Speculation, by Edward Chancellor, is an interesting read that chronicles various speculative bubbles and financial excesses of the past 300-years. It seems particularly relevant to current times, and highlights how little human nature really changes.

During the South Sea Bubble of the early 18th century, companies capitalized on investor euphoria to float shares in ventures that advertised "extracting silver from lead", building "air pumps for the brain", and, most infamously, "for carrying on an undertaking of great advantage but no one to know what it is." These outright frauds and vague promises of wealth seem little different from the Nikolas and SPACs of today.

Similarly, today's optimism over "revolutionary" tech companies echoes various technology manias of the 19th and early 20th centuries. During the "railroad mania" of 1850's England:

...journals and pamphlets proclaimed the railways as a revolutionary advance unparalled in the history of the world. They not only focused on the economic benefits of railway transport, but concerned themselves with its more widespread effects on human civilization. "Railway time," it was said, would change forever the pace of human existence.

At the height of the boom, over 1,200 new railways were being projected at a cost of over £560MM, a figure which exceeded the national income of £550MM. Like the tech giants of today, "from an investment point of view, it was argued that railway shares would remain 'safe in midst of panic.'" Unfortunately, by the end of the boom "railway shares had declined from their peak by an average of over 85 percent, and the total value of all railway shares was less than half the capital expended on them."

Various technological advancements were also heavily promoted before the 1929 stock market crash. The rise of the motorcar caused General Motors' share price to increase over tenfold between 1925 and 1928 (a 3-year rise not dissimilar to Tesla's). The rise of radio fueled speculation in Radio Corporation of America, which was known as the "General Motors of the Air" and traded at 73x earnings. The "national euphoria following Charles Lindbergh's solo crossing of the Atlantic propelled the speculative appeal of the young aircraft industry." Even ignoring present day arguments about valuation, one has to wonder if the electric-car is really more transformative for society than the introduction of the car itself, or, for that matter, the power of flight.

This is not to claim that today's tech shares are similarly overvalued, but only that the argument of a fail-safe safe-haven, based on technological supremacy, is a dangerous one.

Are we in a bubble now? And if so, when will it end?

Unfortunately, the book doesn't provide any easy answers, and I have no idea (sorry!). What does seem clear is that the popping of a bubble is not usually precipitated by a singular event or cause, the end is only obvious in hindsight, and overconfident investors who seem like geniuses end up looking like fools (and often in financial ruin).

While current US equity valuations seem historically stretched and speculation seems rampant, euphoria still pales in comparison to the Japanese financial bubble of the late 1980's, where share prices "increased three times faster than corporate earnings", Japan Air Lines sold for "over 400 times annual earnings", and the "grounds of the Imperial Palace in Tokyo were estimated to be worth more than the entire real estate value of California (or Canada, if you preferred)." Property prices were so inflated that people took out "multi-generational, hundred-year mortgages" to buy homes. Similar to today, speculators "were led to believe that the government would not allow the share price to fall" and bad news was also ignored: "when Emperor Hirohito died in January 1989, [share prices] rose; when a small earthquake hit Tokyo six months later, they also rose."

Perhaps one reliable sign of impending doom is when people start claiming a company is "too big to fail" (South Sea Company), or that the "government will bail the market out" (Japan). The normally cautious author says that "the appearance of the 'too big to fail' argument in speculative markets is a fairly reliable harbinger of crisis" - an argument eerily reminiscent of the "Powell Put."

For practical purposes, reading the book has only reinforced the importance of valuing companies on an individual, fundamental basis - and in never falling for the argument that "this time is different."