We Study Billionaires - The Investor’s Podcast Network - TIP427: The History of Bubbles, Mania & Fraud w/ Jamie Catherwood

Starting point is 00:00:00 You're listening to TIP. On today's show, we have Jamie Catherwood. Jamie is a financial market historian, founder of the wildly popular site investor amnesia and an associate at O'Shaughnessy asset management. In this episode, we discuss historical examples of market bubbles, micromania's happening in the markets today, and analogous examples from the past. Tulip Mania, did it actually happen? The conditions that produce fraud in the marketplace, lessons from the 1800s that could have

Starting point is 00:00:29 prepared us for the recent bust and tech stocks, how the world's first ETF was essentially created in the 10th century, some benefits of speculation, and a whole lot more. For those who are unfamiliar with investor amnesia, I highly recommend you check out Jamie's Sunday Reads, which are highly informative and entertaining. At 26, Jamie is well on track to have an amazing career in finance. So without further ado, let's learn some historical lessons from Jamie Catherwood. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast. I'm your host,

Starting point is 00:01:20 Trey Lockerby, and today we have Jamie Catherwood on the show. Welcome to the show, Jamie. Thank you so much for having me. Excited to be here. You have one of the best blogs, I feel like, on the internet. Investor Amnesia, you have these Sunday reads that are so entertaining. I've been following for a long time. I really love them. And I've been really excited to have you. on the show. But for those who don't know you personally yet, they might be surprised to know how young you are. You're 26, but you already have this amazing career and this amazing library of literature you've written. And you've achieved a lot for being very young, including becoming an associate at Osam, O'Shaughnessy asset management. Talk to us about how you got introduced to

Starting point is 00:01:56 Osam. You've been there for a few years now. Well, first of all, I love this podcast already. It's nice to thank you for all the compliments right off the bat. And yes, in terms of joining O'Shaunacy, So going back a little bit, I was a history major in college, which will be very relevant to this conversation. My dad's philosophy was if you kind of want to do business and you know you're going to want to do business as a career, then you're probably going to get an MBA. And so his thinking was there's not really a point in doing business undergrad because you're just going to do business twice, undergrad and MBA. And so right or wrong, I took that advice and did what I was passionate about, which was history. And I went to school in London. And my dad's also British at King's College, London, and did history.

Starting point is 00:02:38 And the way British degrees work is you just do your major for three years for your bachelor. So I only took history classes for three years. And then along the way, I got interested in investing, but because I was only taking history classes, there wasn't really a way outside of the few economic history courses they offered to kind of learn through school about investing. And so I had a friend recommend to me that I listened to invest like the best, which is Patrick O'Shaughnessy's podcast and Masters in Business by Barry Ritholtz. And so I started listening to those podcasts and just kind of wrote down every term that I didn't

Starting point is 00:03:14 understand and looked it up later. In the beginning, it was basically every other word. And then when I graduated, I ended up getting a job in finance and investing, working for an institutional investment consultant in D.C. And I just cold emailed Patrick one day, figured out what the kind of email format was for Osam and sent him this email saying, you don't know me, but I kind of credit your podcast with helping me learn enough to get a first job in finance. And so if you're up for it, I'd love to kind of take you out to lunch or dinner just to say thank you. And yeah, just because you've given

Starting point is 00:03:49 so much to me and I'd just love to repay it. And he responded back pretty quickly saying that he would love to get lunch. And so he didn't apparently at the time realize that I was in D.C. And O'Shaughnessy is based in Stanford, Connecticut. And so we set a date. And then when the day came, I just got up at like 4 a.m. and drove to Stanford, Connecticut to get lunch. And actually, ironically, I figured I'd already got one of the two podcasts hosts that I'd been listening to and helping me get a job. And so I DM'd Barry Ritholtz on Twitter and ended up actually getting breakfast with him in New York. And then he made sure I figured out the Metro North train to get to Stanford to get lunch with Patrick. But stayed in touch with Patrick. And eventually through Twitter,

Starting point is 00:04:29 got to know Jim Oshanasi and anyone who was on Twitter and Fin Tweet knows how prolific a user Jim is on Twitter. Yeah, the best mean dealer out there. Exactly. And so I got to know Jim and then we just kind of stayed in touch. And then I don't know, maybe two years into my first job, Jim gave me a call and kind of said, Patrick and I decided that you need to come work for us. And so put in my two weeks the next morning and kind of three years later, here we are. Super interesting. We love Jim. We I love Patrick. They've been on the show. Love what they're doing over there with their show as well. And Jim's actually coming back on the show here pretty soon. So that'll be fun. You know, studying history is one thing. Studying financial markets and the history there is a whole other thing. So what exactly peaked your

Starting point is 00:05:13 interests early on to go the financial route as part of your history degree? So as I mentioned, I took some economic history courses in college. To be honest, I found them really boring, ironically. It was more along the lines of how did a new, farming technique in 18th century Britain, improved GDP growth. That is really just snooze fest. But when I graduated, I got into finance and then the same friend who recommended that I listened to those podcasts also recommended I get into FinTwit because I was really big on networking and still big on kind of cold outreach and just trying to talk with people.

Starting point is 00:05:48 And so I was trying to do that on LinkedIn and he said, no, do this on Twitter. And so I got into Twitter, followed everyone he was following, which is the kind of just main finance, Twitter accounts. And I saw that there were a lot of people putting out really interesting content, blogs, podcasts, et cetera. And I kind of missed writing because as a history major, that's basically all you do for your degree is reading and writing. And so I thought maybe there was a way that I could merge these two interests of mine, finance and history. And maybe some people would be interested in articles on that. And so, yeah, I just kind of started writing a few articles on medium and to my surprise, they were very well received and people were interested. It's just total

Starting point is 00:06:29 kind of luck that there wasn't a person, at least in the financial Twitter sphere, kind of solely focusing on financial history. And so it's just pure serendipity that my kind of two main passions were an area where I didn't have to compete with someone that could be writing better than I was. So it kind of just took off from there. And the more I've researched it, the more fascinating and I find it because there are so many innovations today that we think are novel and are new, but there were previous iterations stretching back centuries. And all of it is really just stories in human nature because so much of finances changed, we're not investing logistically and operationally the same way as we were in the 17th century, but the people actually trading

Starting point is 00:07:11 different assets are executing in the same way kind of psychologically. We're making the same mistakes as the people that were trading 400 years ago. Yeah, I was going to say, when we're saying history, we're not talking about the Fed being established in 1913. We're talking about the 1600s, oftentimes on your blog, which is just super interesting. And you've found somewhat of an expertise writing about bubbles, mania, and even fraud. And when people think of bubbles, I often hear them referring to it as something like tulip mania, right? You hear it all the time. And when I was reading your research, something that stood out. It's very surprising to me. But tulip mania might actually be a misnomer. So talk to us about how Tulip Mania has become this shorthand and how maybe it

Starting point is 00:07:53 never even occurred. Yeah, so this is kind of one of the bug bears I have. And it all stemmed from Jason's Wig at the Wall Street Journal, who's become a good friend because he's an equally passionate financial historian. And he recommended that I read this book called Tulip Mania by Anne Goldgar, which only after it arrived from Amazon, I realized she was actually a history lecturer. Kings and that I must have had at least one or two lectures by her my first year. So that was funny. But her book is an amazing account of the so-called tulip mania. And what she shows is, you know, there's no questioning that people were buying and selling tulips and there were probably some ridiculous prices paid for them. But there's kind of three issues. So the first issue is

Starting point is 00:08:39 that mainly people today get their idea of tulip mania from Charles McKay's extraordinary delusions and madness of crowds or whatever the title. is. And the problem with his research was that it was based on largely the work of a German writer in the 18th century. And that German writer had gotten most of his kind of source material from these pamphlets and circulars that were kind of floating around at the time of the Dutch tulip mania. And they were all satirical. And so what was happening is that the kind of elite class in Holland was unhappy that this new kind of class, of merchants that were getting involved in the tulip trade were making money and kind of elevating

Starting point is 00:09:21 their own status within society into the kind of upper echelons because they now had this money. And the wealthy people thought they weren't deserving of being in this elite class because they were kind of new money and et cetera. And so they started kind of putting pamphlets talking about things you hear today when people talk about tulip mania that people were getting drunk at taverns while their wife and children starved at home and they were losing all their money kind of betting on the prices of tulips and that people were paying as much as the price of houses for a single tulip bulb. People were committing suicide because they went bankrupt from losing all their money in the tulip crash. And this was all just exaggerated kind of stories and propaganda

Starting point is 00:10:03 designed to convince people broadly in society that this was a bad thing that should be stamped out. And it was really just because these wealthy elites did not like the fact that people were kind of entering their realm of society. And so this German author in the 17th century, though, took all those pamphlets and took them as fact and wrote about them and just took every story as if it actually happened. And then Charles McKay came along, used his work as the basis for his sections on tulip mania. And now everyone just kind of assumes that this is all true accounts. And what in Goldgar's book found, because there's all these stories of one tulip bull being traded like 300 times, et cetera. And Anne Golgar spent years in the archives, you know, like tracing the

Starting point is 00:10:49 transactions. And she said the longest chain that she could find was like five. And the other thing is the way that these tulips were traded is basically in the fall. Someone who actually knows about gardening will tell me I'm wrong about this, but say it's fall is when you plant the tulip bulbs and then the winter, they're just underground. The spring is when they would come up in bloom. And then that's when the person that purchased the tulip would actually get the tulip. What usually happen is that they were kind of like futures contracts. And so they would make the agreement to purchase in the fall, bulb go underground. And then in the spring, that's when they would actually pay for it. And so some of these absurdly high prices that people talk about, like the price of

Starting point is 00:11:29 houses, et cetera, no one actually ever ended up paying that price in many situations. It was just kind of the agreed upon price. But then a lot of these transactions didn't actually end up happening because by the time spring rolled around, the people that agreed to pay that much just kind of were making themselves invisible. They didn't want to pay it, et cetera. And so it's just one of those things that's very interesting from a kind of human nature standpoint, how a narrative can just take hold even though it's just not true. And so it's become the kind of go-to reference for anytime someone thinks it's speculative

Starting point is 00:12:01 kind of fervor is ridiculous or in something that they deem stupid, then it's just exactly like tulip mania. And that's it. it's just become the kind of shorthand for this is dumb and it shouldn't be going up. And so it's just like tulip mania, whether it be Bitcoin during the dot com bubble, like same thing. And so just interesting how it continues to persist when it's not actually based on fact. Yeah, it kind of reminds me of like, say if someone dug up some propaganda of marketing

Starting point is 00:12:26 from a magazine from like the 60s showing how doctors are recommending cigarettes and then, you know, all we had to go on was, hey, cigarettes must be great for you. No one did the due diligence from there. Or like people use ramp capital. like liquidity on Twitter today and their memes as like, oh, wow, this all stuff actually happened. Like, no, it's just a meme. Right. Exactly. So obviously, Tulamania, it's one example of a bubble, but let's talk about what are some of the signs of a bubble forming. And then I'd love to talk about the signs of a bubble about to burst. So I think one of the best frameworks for understanding

Starting point is 00:12:57 kind of how bubbles form and why is the bubble triangle, which is a framework that my friends at Queens University, Belfast, John Turner and William Quinn wrote about in their great book, Boom and Bust. And the Bubble Triangle is basically a financial recreation of the fire triangle, which is heat, oxygen, fuel, and then you need the spark to kind of ignite the fire. But with the fire triangle, you have to have all three sides available to sustain a fire. And if one of them is taken away, then the fire goes out. And so they took that kind of approach and applied it to the formation of bubbles, and they are placed the sides with speculation, marketability, and money slash credit. So in that framework for heat, the heat is speculation. And so that kind of doesn't even

Starting point is 00:13:48 need to be explained, but obviously, it's just people wanting to get in and make money on an asset that they see others making money in and prices just keep rising. And so more people get involved because they think that there's an opportunity to make money quickly and easily. And then The oxygen for a bubble triangle is marketability. And that does not mean the kind of traditional definition of marketing, but rather the ability to easily buy and sell shares. And so if it's easier to buy and sell an asset, then it's going to be easier for more people to get involved and kind of keep the momentum and excitement going.

Starting point is 00:14:22 And so you need that because you can't really get national hype and widespread speculation if it's really hard to actually buy the asset. And then lastly, you. you have the money and credit side of the triangle, which is the fuel. So as we all know, especially today, when there's low yields and cheap money and just money printer constantly burring, there is a lot of kind of speculative bubbles around the market, whether it's one large one or kind of a bunch of pockets of mini bubbles that can be sustained because yields are low and it's easier to finance companies. And it's also kind of pushing investors for.

Starting point is 00:15:01 further out on the risk spectrum because they have to kind of stay in riskier assets when yields are so low. And then the kind of initial spark that sets off the overall fire once these three sides are there is usually throughout history a technology and some type of innovation or government policy. And so in recent history, I feel like it's leaned more towards the technology side of the spark, but also in the 2008 crisis, you could talk about the kind of government's initiative to make sure that everybody could buy a home, et cetera, and pushing the housing industry. And this framework, though, I think is really useful. And it kind of demonstrates how history can actually be applied to modern markets because it's an actionable framework where obviously not every single bubble

Starting point is 00:15:46 will fit this triangle. But it's a good way for thinking about whether a bubble is forming and why a bubble is forming. I'm kind of curious how you look at mania and bubbles together. For example, Like right now, everyone's saying we're in a bubble. We're in the everything bubble. Even Jeremy Grantham saying we're in a super bubble. And maybe it's just hard when you're in it and you're myopic that you don't see the mania around you until everything's crashed and you have hindsight. But are you seeing mania in today's markets? And if so, like describe that and maybe how it compares to previous manias we've seen. So I definitely think that there are, especially over the last two years, there's been no shortage of pockets of mania. I think what's interesting about today versus history is

Starting point is 00:16:26 that there tend to be more mini manias today in areas of like kind of diverse areas of the market instead of one massive mania kind of dominating the whole market, which tends to be more the case in history. And I mean, just going back through the last two years, I don't want to even get into kind of like crypto NFT, but JPEGs of rocks, but which I do think there are merits to both of the categories I just mentioned. But I think that for me, one of the interesting examples has been with SPACs and kind of these EV companies that went public because so many of them had literally no product or no sales and were just kind of going off hype of orders. And still, investors were enthusiastically buying up the shares. And it just makes no sense. I mean,

Starting point is 00:17:09 Nicola's a prime example. I think in their first quarterly report, they had $36,000 in revenue. And that was from installing solar panels on Trevor Milton's ranch. And so, but still, the price soared like 80% in the first month of trading. We all know how that played out. But I think that that is an example of mania somewhat recently. And also ties into this kind of idea that I've written about before of the three eyes. The three eyes is kind of this Warren Buffett quote from 2008, where in an interview with Charlie Rose, he's talking about how in most instances of speculative manias, there's this progression from the innovator who kind of has the original idea. idea or applies or creates a new technology. And then there's the imitator companies, which are not

Starting point is 00:17:56 necessarily bad companies, but they're just not the first mover. And so you have like the lift to an Uber. And then the third phase is when you have the idiots, which is not applying that term to investors, but to the kind of more fraudulent and shady people starting companies to kind of just take advantage of the hype cycle around whatever the exciting innovation is. And so you see this play out many times over history. What I found interesting is that with this three eyes quote, there was actually basically an identical version of this idea in an 1866 issue of the economist, where an article stated that there were three stages to a speculation. First, the clever man, the original man, finds a good thing out. Then the whole trade sees he is right and joins.

Starting point is 00:18:41 And at last comes the gentleman from the West End and upon which we know it is all over. So not the three eyes, but the exact same concept where there's kind of these three stages and there's the original guy. Everyone catches on and applies the new idea and then someone comes and ruins it for everybody by taking things too far. And with the Nicola example, I think that it was fascinating because it played out so quickly. Usually there's a more of a kind of lag between these three phases. But when Nicola first went public through this back, I think in May or June of 2020, it was occurring at a time when Tesla's shares had just been on like a wild ride. They were up hundreds of percent. I don't remember already like year to date. It was one of the popular stocks as the kind of day trading Robin Hood.

Starting point is 00:19:26 Everybody stuck at home crowds started getting involved. And this was a household name, Tesla. So that was a popular stock. And people that had missed out on that Tesla opportunity and saw so many people, especially with the way TikToks were going around on social media, so many people were posting their gains made in Tesla. Then when Nicola came, about and they were going public, then it was kind of this opportunity to get the next Tesla, which in this case was ironic because one company is Tesla and the other is Nicola named same founder going back to the 1800s. And so even though Nicola had no actual working product yet that they were selling, then it didn't matter to investors because they just wanted to get in on

Starting point is 00:20:06 the exciting kind of space of electric vehicles and be early on the next Tesla. So they didn't miss out again. And so despite the evidence, the stock price went up and people got over enthusiastic. And then it kind of all went downhill from there for Trevor Milton and Nicola. So that was interesting because it was, Nicola was simultaneously, the imitator and the idiot. But that was just a clear kind of progression to me of that three-ey cycle. And it was really interesting to watch in real time. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every

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Starting point is 00:24:42 All right, back to the show. Yeah, and Rivian was valued, I think, around $100 billion before making a single sale. So I definitely hear your point there. You know, knowing Buffett, he definitely read that 1866 Economist article, which, you know, I didn't even know the economist has been around that long, which is just also incredible. You know, Buffett has another quote similar to this on this topic around the proliferation of new technology. he has a quote around when the automobile first came into existence and the mania that sued around that.

Starting point is 00:25:12 And how I think at that time there's around 300 auto manufacturers that came to the market, you would have been much better off shorting horses rather than trying to pick a winner. And so I love this idea of tech being the spark. Talk to us about the tech bubble of the 90s. And I don't mean the 1990s. I mean the 1690s where we had tech bubbles and bicycles and all kinds of things. Yeah. And just to go back to your Buffett quote and what's valid.

Starting point is 00:25:36 fascinating about that era is that electric vehicles were actually the dominant form of transportation when the automobiles came about in the late 1800s. And I think it was until 1912 that electric vehicles outnumbered internal combustion, kind of traditional gasoline-powered automobiles. And Henry Ford's wife actually drove an electric car of Baker Electric. There's a great video of Jay Leno on Jay Leno's garage driving around this 1909 Baker Electric. And so just fascinating that people think, again, vehicles are new innovation, and it was actually the original. So it's kind of just a century-long comeback story. Well, they could only go, what, two miles at the time or something like that? No, that's the fascinating thing. No, yeah, some of them had longer ranges than cars today. I have an article up here. They're charging

Starting point is 00:26:22 stations all over. And yeah, some of them could go, I don't know, I want to say like 186 miles or something. Incredible. Yeah. In incredible. In 1909, Baker Electric, the one that Jay Leno drove, could go up to 100 miles on a single charge. So it's pretty impressive. But yeah, so the 90s tech bubble in the 1690s is one of my all-time favorite bubbles. And that's because it was partially sparked by technology, but initially sparked by a treasure hunt. And so what happened was in the 1680s, in the late 1680s, there was this sea captain named William Phipps. And he was always around the sea docks in London. And he kept hearing rumors of this sunken treasure ship somewhere, near the sea captain. South or Central America, and he heard that the ship had apparently been kind of transporting back

Starting point is 00:27:13 all the riches from the Spanish Empire's colonies to Spain, and that somewhere along the route, I guess they'd been too greedy and packed too much treasure. And so they actually sunk to the ocean floor. And so allegedly there was all this treasure just kind of sitting around. And eventually, after hearing this rumor for so long, Phipps decided, I'm going to go see if this treasure is actually there. And so obviously it's expensive to fund this whole kind of journey yourself because you need crew, supplies, a ship, et cetera, and for months. And so that's expensive. And so he went to London to find kind of a group or a single investor to stake his journey and get a percentage of the profits. And so he finds this Duke, the Duke of Albemarle. And the Duke and this small kind of group of investors

Starting point is 00:27:59 form a joint stock company specifically designed to fund this expedition. And much like modern venture capital, the group of investors would receive a payout based on whether he found the treasure or not. It's also interesting is that shareholders at this time were frequently referred to as adventurers. And so I just let like venture capital, this is a very similar type of investment to how modern VC works. And it was literally at that time investors were referred to as adventurers. And a treasure hunt is the definition of an adventure. And so sure enough, Phipps goes off on this voyage. and he finds the treasure, he finds the ship.

Starting point is 00:28:37 And there were actually 32 tons of treasure on the ship, which is just can't even really comprehend the size of that. It's too large a number. And I want to say they spend like two full months hauling up treasure from the ocean floor, and they still couldn't transport all of it back. And he comes back to London. And that small group of investors, the Duke and his colleagues made 10,000 percent return.

Starting point is 00:29:03 and it did not take long for kind of word to spread of just gargantuan return that these investors made and all the riches that they had achieved. And so there was an explosion in diving engine technology companies where going back to this three eyes concepts, William Phipps was obviously the innovator. He's the first person to achieve the success. And then everyone else either wants to fund an equally successful treasure hunter or come up with a way to find sunken treasure themselves. And so you started to see this proliferation of diving engine technology companies, which were just these bizarre apparatuses that were designed to allow

Starting point is 00:29:45 a treasure hunter to breathe underwater longer with the very simple thesis just being, if you can breathe underwater longer, you can search for treasure longer and you can increase your probabilities of finding treasure as a result. And so you had all these companies called things like the John Williams, diving engine technology company. And I think there was some stat that in the 17 years before Phipps' treasure hunt, there were like two patents related to diving engines. And then in the two years after his treasure hunt, there were 17 patents filed in relation to diving engine technology companies.

Starting point is 00:30:23 And as you can imagine, none of these companies ever found any treasure. And it was whole kind of just bust. But there was this widespread excitement around diving engine technology and the capabilities. And also in general, because of the joint stock kind of investment vehicle that these investors staking Phipps's journey had used, there was a excitement just for joint stock companies in general. And so there were a bunch of listings in non-diving engine technology related companies. So there's kind of this widespread stock market bubble with a ton of IPOs. And in 1697, 70% of the companies that had been trading in 1694 were wiped out.

Starting point is 00:31:06 So of all the companies that were being bought and sold by investors in 1694 within three years, 70% of them were wiped out of existence. And so that kind of just shows you the nature of the boom bust there. But yeah, fascinating period and really interesting and fun example of a 90s tech bubble outside of the 1990s. And I read on your website, too, that there were something like 670 bicycle companies that entered the market when the first bicycle companies arrived. Talk to us about that. That's also one of my favorite bubbles that you've written about. So I'd love to hear about that. That was in the 1890s. And I mean, there was a bubble in the U.S. actually, our first panic in 1792, not technology related, but seems to be a trend of tech bubbles in the 90s of a century.

Starting point is 00:31:53 And so, yeah, the bicycle mania was in the 1890. and all of what I'm about to say, again, comes from those two Queens University, Belfast academics, and everyone should read their book. It's the great account of this bubble. But essentially what happened was in the 1890s, there were a series of kind of manufacturing innovations where, I don't remember all of them, but they related to like ball bearings and kind of welding and the materials used to create bikes. And the bicycle went from the penny farthing, which people might not immediately know what I'm talking about, but you've probably seen those old pictures or old illustrations of the tires where it's like a massive bigger than you front tire and then

Starting point is 00:32:37 like the tiny little tire at the back and they just look absolutely ridiculous. And during the 1890s, these series of kind of innovations led to the creation of the bicycle as we know it today. They look exactly the same. They kind of have that pneumatic tire and the diamond shaped frame, which made for a more easy and comfortable ride because you weren't like 15 feet off the ground. And there was just widespread excitement for this new kind of easier mode of transportation. And the British public was just enamored by bicycles. Interestingly, it also had really significant impacts on women's rights because it kind of modernized how women were viewed in society, particularly in the way that they were expected

Starting point is 00:33:19 to dress. Because with these bicycles, you couldn't wear these kind of like frilly. large dresses that they were kind of expected to wear previously because they would just get caught in the spokes and crash. And women started to kind of wear more pants, etc. So just kind of an interesting side story about how a bubble kind of revolutionized women's rights in the 1890s in Britain. But yeah, so once there was this kind of excitement for bicycle companies, again, wave of entrepreneurs recognized this national excitement and started forming bicycle companies. And so in two and a half years, 671 bicycle companies were formed and traded on the

Starting point is 00:34:00 exchange. And it's just, I mean, I feel like there were too many to remember EV SPACs in IPOs in the last two years. But the thought of 670 of any type of industry going public in two years is just remarkable. What's also interesting is that some of those bicycle companies were actually the same ones that pivoted into electric vehicles a few years later. There's one in particular. I can't remember, but they were just riding transportation mania to transportation mania. That's so fascinating. You know, one of the other bubbles that stood out to me, maybe it's because I work in beverage and just love this story, is also from the 1800s.

Starting point is 00:34:37 Interestingly enough, things were getting pretty wonky in the 1800s. But this is the story of Guinness and its IPO. Talk to us about the magnitude of this bubble. Yeah, so it actually was the kind of spark for a broader Rue Rueh-Rie Mania in the 1880s. and bled over into the 1890s. And, yeah, essentially Guinness decided in, I think, 1886 to list their shares. And when they did so, Guinness was still the kind of dominant brand just as it is today. It's recognized everywhere.

Starting point is 00:35:10 And especially at that time, there was still this belief that there were some, like, medicinal benefits to drinking it. And so just everybody knew it is the main brand. And so when the company said that they were going to list their share, everybody wanted to get in on the action. And what was interesting is you have to remember at this time, obviously, actually getting shares in an IPO is a lot more complicated than it is today because there's no electronic, you know, kind of submission process or anything. And so the process at that time was Bairns Bank, which many listeners will know, they opened their doors, I think, on a Saturday for subscription where people could come kind of fill out their subscription forms to get an allotment of shares, locked in for the IPO. And I think actually was supposed to be open all day, but then within three hours, they had sold all of the available shares. And the investors that had come kind of just didn't accept that. And so the Barons Bank had to call in two like police brigades to basically

Starting point is 00:36:12 barricade the doors and quell the crowds because people were so kind of manic about getting a purchase of Guinness shares. And one thing that they started to do was tying these subscription forms to rocks and just hurling them through the window of this Bering Bank because they couldn't get into the building anymore because the police were blocking the doors. But they just figured if I can just get this form and maybe I can get shares of Guinness. And so they would just attach it to rocks and hurl it through the window. I want to talk a little bit more about the conditions that produce fraud. So, you know, people in recent history, maybe Enron might come to mind. But talk to us about some of these older examples of fraud becoming prevalent, you know, once the mania ensues?

Starting point is 00:36:56 Yeah. So overall, it's just kind of, again, I said at the beginning that we're still making the same mistakes that we did 400 years ago. And it's because of our human nature. And I mean, it just happened. There's no shortage of examples in the last year where when everyone's making money, you can fight your kind of own good instinct to avoid getting swept up by a mania. But a lot of us eventually just cannot keep that kind of discipline up forever because you just keep seeing these people that you know well make money. That's whatever the Buffet quote is, but you hate seeing your dumb neighbor get rich. And so I think that the reason that fraud continues to persist, no matter how much information, I mean, this is, we're in the age of information, right?

Starting point is 00:37:37 But throughout history, we see every time a new technology provides investors with more access to information that doesn't really impact markets in the ways that you think it would? And so with fraud, when prices of assets are going up and the market is going up and people are making money, these companies, whether they be just downright fraudulent or just have questionable kind of business models, they're not really being exposed because if you just think about it behaviorally, if you have a fraudulent company in your portfolio and you obviously don't know it's fraudulent, but if it's making a ton of money, why are you going to look for reasons to kind of doubt the company and look for reasons why it's actually a fraud that's making you so much

Starting point is 00:38:20 money. There's no reason you're just going to be so excited that you were smart enough to buy it and get in on it before others. And so in these periods when prices are going up, people are more kind of willing to suspend their sense of disbelief because they're making money and they just want to believe in the story and whatever is being fed to them by the company's management. But then when things in the market start to turn and prices are falling and people are suddenly losing money in their investments in shady or fraudulent companies, then that's when people really start kind of pouring over the business model and financials of these companies. And that tends to be when frauds are exposed. And it's because people are instead of now being previously excited

Starting point is 00:39:03 about companies and just believing in whatever they're being told, now people are demanding answers and saying, why is this happening? Why do your financials look questionable here? Can you explain this and then eventually management runs out of answers and the frauds are exposed. All right. So we have seen a lot of busts recently. The high-flying tech companies, SPACs, even ARC has been underperforming. There's inversion. Yeah, there's an inversion ETF now for ARC. Again, if we go back to the 1800s, what could we have learned from, say, the railway boom that might have prepared us from being what I've heard you say, surprised by the inevitable? Yeah. So kind of specifically during COVID, I've just found it really interesting that so many of the stocks that were initially like soaring and they were the work from home stocks like a Zoom, Peloton, etc.

Starting point is 00:39:53 Quickly people kind of began to reset their expectations of future growth based on how these companies were doing in a unique environment to put it mildly. and just kind of expecting that that type of record growth to happen forever, regardless of whether everyone's forced to stay at home during COVID lockdowns. And the kind of resetting expectation was not this is just pulling forward future growth. This is their new growth. Like now, finally people discover these products. And so they'll just grow exponentially forever. And Peloton, obviously being the most obvious recent example, that is not the case.

Starting point is 00:40:29 When Jim started reopening, people stopped using solely their Peloton. and went back to gyms. If you look at the performance, at least the last time I checked, the performance of Planet Fitness versus Peloton stock is just like the best example of how these narratives clearly shifted because one has done well as lockdowns were eased and the other has plummeted. And so I just found that fascinating where there's no new information that we learned from when these were the darling going to go up forever stocks. And now when they're going down and struggling, it's you could have told anyone or you could have

Starting point is 00:41:03 realized back then that obviously when lockdowns end, there's going to be a slowdown in their growth. But then when that happens, it's as if everybody's like, oh, my, how did this happen? I never saw this coming. It's like, obviously, gyms aren't just going to be shut forever. And so if you have a work from home or if you have an at-home fitness product, you're not like you're going to lose your temporary kind of 100% market share for fitness because people are going to want to go back to gyms. And I don't know, I think people can just get very quickly swept up and convinced by a narrative and just ignore information. I mean, that's obviously the reason why we have bubbles. And I remember tweeting at the beginning of the pandemic that people were predicting the future of post-COVID life with

Starting point is 00:41:44 like the same accuracy as 1980s movies showing what 2020 would look like. And if you watch those movies, it's like, by 2020, everyone will have flying cars, et cetera. And we don't. But still, everyone at the start of COVID was talking about how no one will ever. ever travel for business again. Everything is changed forever. We're never going back. And that's just not the case. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:45:45 correctly, you can profit off of these human behaviors. And so, just reminding people that sometimes this is a feature, not a bug, if you're looking at it as an investor, a savvy investor anyway. I mean, yeah, there's 400 years of supporting evidence for quant investing by just looking at these just countless kind of mistakes that all come down to human nature and doing the systematic quantitative investment approach where you remove the human element just kind of helps ensure that you don't get swept up by short-term fluctuations and hype. And to that point, actually, a really interesting kind of anecdote I found this week was from a book written in 1906.

Starting point is 00:46:26 On my website, I have a library section where there are all these kind of finance and investing books from the 16, 17, 18, 1900s that are available in Archive.org. And they're fascinating to read through. You can search by keyword. But one of the ones that I was reading was talking about how in like 1904, I think, that there was a. a study done of 4,000 brokerage accounts over a 10-year period. And they found that 80% of the accounts showed a final loss. So 80% of these accounts lost money and that people tended to, as we still often succumb to today, buy high and sold low. And that for the people who did do well, as they continued to do well, they started getting more kind of gutsy with their trades and

Starting point is 00:47:17 being more kind of speculative because they just, I guess, got more confident. And so they started placing more larger frequent trades and that hurt them. But one of the other fascinating insights they found was, again, at this time, you can't just trade yourself. You have to trade from a brokerage office. And they found that account holders who did not live near a brokerage office where they could go trade did better than local traders to a brokerage office because they just couldn't over trade on short-term news. And so in this 1906 book, they say something like just this pure factor of distance restricted the kind of ability for people to make fools of themselves by just trading on short-term news that be irrelevant in a week. That's so interesting to me. I'm glad you brought

Starting point is 00:48:03 up the quant aspect as well, because from what I've read, almost three-quarters of the market today is traded algorithmically or on a quant basis, which you would think, oh, those computers should be a lot smarter than humans, but you're seeing kind of the same bubbles. And it makes sense if you've ever modeled anything, right? If you're taking like a rolling 90-day average and projecting it forward and making assumptions based on that and then reality sets in and something doesn't hit its mark, you see those Peloton 80% drops all of a sudden. And it's just funny how like we've implemented all these computers to make ourselves smarter and yet we're seeing the same exact cycles. Yeah, I mean, there's definitely, you can do quant wrong just as you can do traditional fundamental

Starting point is 00:48:42 wrong because the end of the day, there's still humans creating the models. And so you have to have the kind of discipline and initial structure in place to make sure that you are investing programmatically and systematically in a way that is actually going to be successful over the long term. And you're not just using like a one year back test to systematically invest forever that way. Yeah, it kind of gives me hope in a sense. because I think it would be hard for now for a computer to say, hey, well, when the world opens back up, gyms might perform better. They have to.

Starting point is 00:49:14 That seems like a hard thing to program to me, but, you know, it's probably coming. Now, one piece of trading technology that you would think would be really new may not be the case. I'm talking about ETFs. And as you've stated it, ETFs could be traced back to 10th century Venice, Italy, basically, through something called a commenda contract. So talk to us about what a commenda contract is. and how it relates to ETFs today. Yeah.

Starting point is 00:49:39 So before a bunch of ETF enthusiasts come after me, this is not to say that these were literal ETFs traded in the 10th century. So I wrote this article called The Road to ETFs a few years ago. And it was just kind of looking at the key themes around ETFs and their innovation. So providing diversified access to small retail traders, low costs, and just the ability to buy kind of fractional shares in, different companies and diversify yourself. And so I started looking back throughout history just to see what kind of financial instruments were invented that offered similar characteristics.

Starting point is 00:50:17 And one of the ones that I found were these commended contracts in 10th century, Venice and Genoa. And there was a couple different variations of the contracts, but essentially what they boiled down to was you had a passive investor who was the financier of a voyage because the need for these came kind of going back to the William Phipps example of the treasure hunt where he had a voyage that he wanted to complete, but as a single kind of individual, he could not fund that entire expedition himself. And so he found a group of investors to fund that voyage and cover the costs in exchange for a percentage of the profits. And so in 10th century, Italy, merchants faced a similar problem where they had a bunch of goods and they wanted to sail to a distant port to sell them,

Starting point is 00:51:04 but it was very costly to fund that voyage. And so the commended contracts were kind of created to help offset some of this risk on the merchant's side and also allow investors to kind of not put in necessarily 100% of their capital into one voyage because that is obviously not diversified. And so the commended contracts, they were structured so that in some cases, the merchant would pay something like 25% of the. the funds voyage costs, and they would receive 50% of the profits. And for the passive kind of investor, the financier, they would be responsible for 75% of the funding for the voyage and also

Starting point is 00:51:50 be entitled to 50% of the profits. And so depending on the type of contract, there were differences in the percentage split. But for the merchant, it was great because they only had to put up 25% of the capital. And they could still really. receive 50% of the profits, but they also had to be the one to go actually take this journey. And at this time, there was no guarantee that they would make it home. There were pirates, you know, bad storms, shipwrecks like ships frequently got lost at sea and never returned. And so it's very much an active investment on their part and had skin in the game. And for the passive financier, just funding the journey. And so 75% is still a lot, but there are

Starting point is 00:52:31 also a lot of contracts where they had to put in only 50% of the financing. And so just even that allowed them to put what they previously would have put 100% into funding one voyage. They could do two voyages now where they put 50% in each. And so they were diversifying a little bit more. And then over time, these contracts kind of became even more sophisticated where there are lots of financiers funding these voyages. And so they could buy even smaller percentages and kind of build a portfolio of these commended contracts tied to different voyages and get payouts, well, I guess if and when the ships returned from selling the cargo at some distant port. And so you kind of begin to have this secondary market where people could also buy and sell

Starting point is 00:53:15 these commended contracts and like ownership stakes in commenda contracts to other people. And there's actually, I think in the 1200s really great titled book called the, it was written about commended contracts and it's titled the Commendia contracts and it's titled the commenda contracts of humble people, which I took to mean, you know, small investors. And similarly, mutual funds date back farther than you might imagine. The modern mutual fund, in your words, was essentially invented sometime around the 18th century Holland timeframe. So talk to us about what the mutual fund looked like back then compared to today. In 1772, this is another theme that repeats often throughout history where after a crash or kind

Starting point is 00:53:54 of crisis that there tends to be a wave or even just one kind of innovations usually happen after a crash or crisis. And so in the summer of 1772, the price of, I believe is the British East India company stock like tanked. And a lot of Dutch banks were heavily exposed to the British East India company stock. And it wiped out a lot of Dutch banks and brought down, I mean, it almost brought down like the whole Dutch financial center. And at this time, the Dutch financial system was huge. I mean, they were like the center of all financial activity. And so this kind of example of a bunch of banks and people that held money at their banks being exposed to the risk of a single company kind of highlighted the risks of concentrated exposures and not being diversified. And so this Dutch

Starting point is 00:54:49 broker named Abraham Van Ketwich in 1774 decided to offer a fund that would have kind of freely traded securities where people could buy shares into the fund, which would hold, I think, like the actual portfolio was 50 bonds across a range of categories. So a lot of them were traditional kind of government bonds of local governments in Holland and also like a few other European countries bonds. And then also there are things like canal and turnpike bonds or revenue streams tied to canals and turnpikes. And it was equally weighted across these. I think it was 10 categories and 50 bonds. So it's basically a passive bond index equally weighted. And what was interesting though is that to ensure that there was no room for kind of human error, kind of going

Starting point is 00:55:39 back to what we were just discussing with quant models, they decided to have the three portfolio managers of this fund put all of the shares of the bonds that they had purchased all of the kind of physical paper certificates into an iron chest that had three locks. And so if anybody, if any of those three portfolio managers wanted to kind of react to short-term news or events, they couldn't just go open this chest and sell these certificates and sell these positions. They would have to, all three of them, come together with their key and unlock. this chest at the same time. So, you know, you kind of talk about your investments being locked up, a lockup period. This is the definition. And the original multi-sig Bitcoin wallet maybe.

Starting point is 00:56:26 Yeah. Another really interesting aspect of that fund was first it had the great name of Unity Create Strength, which is like for the innovation of diversified portfolio management. I feel like that's a brilliant name. And also it had a really low expense ratio. I mean, whatever they called it then, but the cost of buying and holding was, I think it was like 20 basis points by modern standards. So, I mean, you can find many passive bond funds that I feel like would probably offer something very similar today for 20 basis points. And so it's just interesting that from inception, these funds were cheap. And that guy, actually, Abraham Vanquit, which, he was really innovative where he launched a second fund in 1779. And it's considered to be the world's first value fund

Starting point is 00:57:11 because in the prospectus for this 1779 mutual fund, the prospectus said that it was, its strategy was to buy securities trading at prices below their intrinsic value. And so this guy is kind of like the true godfather of value investing. And he also had these interesting kind of dynamics where he would buy back shares of the fund. It was like this weird lottery system where shareholders could enter into it and there would be repurchases of the fund. shares if they won that lottery and they would get a payout at a certain premium. And so this fund was not only doing value investing in the 1800s, but also doing like shareholder repurchases.

Starting point is 00:57:53 And so it's fascinating and very innovative individual. I want to touch on the idea of speculation. And when speculation comes to mind, it usually has a negative connotation to it. But you've written about the fact that there might be some benefits to speculation. What are those benefits? Yeah, so I do want to reiterate that overall speculation often leads to a lot of people losing money. And it's not to say that just overall, it's definitive answer. It's actually a good thing. It's not that much of a hot take. But I do think that there are some positives and benefits to speculation that are ignored.

Starting point is 00:58:27 And I think one of those things is that when there's periods of speculation, the reason these kind of manias form is because more and more people want to achieve the returns that they're seeing others. achieve. And so they kind of hurt into exciting speculative stocks. And while that often leads to people losing money, it also brings people into the market that might not have otherwise ever been interested in investing. And so obviously, the younger people start investing, then the better they can prepare themselves and kind of set themselves up for success down the road because they can compound their returns longer over time. And so while looking at NFTs recently, it's easy to just say that person's stupid. They bought a JPEG of a rock for it, however many dollars. And while you might think that's stupid, overall, I think that there's a huge, huge population of people that would probably

Starting point is 00:59:18 not have gotten into buying stocks or buying ETFs or investing at all if it wasn't for their interest in the NFT in crypto space, drawing them in initially. They might have never been interested at all investing, but that kind of gateway of crypto exposes them to. to just kind of overall concept of investing of finding an asset you like buying it, holding and selling it, et cetera. And then from there, think, you know, oh, well, might as well check out the stock market too and see if I should, you know, buy some ETFs, etc. Whereas if there wasn't this kind of speculative boom around NFTs and crypto, then they might have never really gotten into investing until much later. And so people lose money, obviously, but it brings people

Starting point is 01:00:01 into the market. And what is an interesting historical parallel for this concept is in the early 1900s when bucket shops were beginning to be shut down. So bucket shops for those who don't know in the late 1800s and early 1900s, the order minimums on traditional stock exchanges were just prohibitively high. I think oftentimes if you did all the kind of traditional orders, it would end up costing usually a minimum of like $100,000 to place a trade. And so if you're the average investor, you don't have $100,000 to just dabble in the market. And so you really couldn't access the financial market or you couldn't access the stock exchange, like New York Stock Exchange. And so what happened was that people started turning to bucket shops, which were

Starting point is 01:00:47 kind of like, I guess you would say paper trading apps today, where it's all still linked to real-time market information. So these bucket shops were plugged in by tickers and telegraph cables to the New York Stock Exchange. And they were getting real-time prices, but the prices and shares that people were buying in bucket shops were just purely paper trades. If you bought 50 shares of ABC Railroad in a bucket shop, you weren't actually, you didn't own those shares. You were just kind of gambling on the direction of ABC Railroad's price. And so you weren't actually really accessing financial markets because you didn't have an ownership stake. but it was a way that many people became exposed to the market for the first time because they couldn't access kind of the markets through traditional exchanges.

Starting point is 01:01:33 And this was the only way they could really have any exposure to financial markets. And then in around like 1915 is when the stock exchanges kind of finally succeeded in getting the bucket shops shut down because there ended up being a lot of knock on effects from bucket shops that impacted the market because what bucket shop kind of operators would do. is inverse of the stock exchange were in the bucket shop, you know, for every dollar that a patron in their bucket shop gained, the bucket shop lost. And then so when the bucket shop operators knew that a bunch of their kind of gamblers in their bucket shop were betting on the direction of stock one way and that they would, the speculators would make a lot of money if it went that way and the bucket shop would lose a lot of money, then the bucket shop would orchestrate a large order on the real stock exchange to drive that.

Starting point is 01:02:24 that price down so that their speculators in the bucket shop would lose money. And so these kind of huge orders to kind of ruin the speculators in bucket shops trades would lead to these really volatile swings on the traditional exchange. And what happened was that eventually the exchanges got the bucket shop shut down and a lot of bucket shop speculars ended up going to the stock exchange and investing there. Again, you see this kind of evolution and maturity of what many would have said are degenerate gamblers, you know, speculating in these cede bucket shops into more mature, longer term investors on the stock exchange. Jamie, this has been so much fun. I want to make sure I give you the opportunity to hand off to our audience where they can learn

Starting point is 01:03:09 about you, but I also want to just emphasize everyone should go check out investor amnesia.com. Your Sunday reads are just such a delight to read. And also you've put together a couple of courses that I do want to highlight, share any other resources you want before we let you go. Yeah, so as you mentioned, investor amnesia.com is the place you can kind of find everything that I publish and write and you can subscribe to the weekly free newsletter that goes out every Sunday morning. Fantastic. Well, Jamie, really enjoyed it. I learned a ton. Keep doing what you're doing and keep the Sunday reads great because I enjoy them all the weekend. So appreciate it so much. And let's do it again. Awesome. Thank you so much again. All right, everybody. That's all we had for you this week. If you're loving the show, please don't forget to follow. us on your favorite podcast app. Definitely reach out to us. You can find me on Twitter at

Starting point is 01:03:57 Trey Lockerby. And if you haven't already done so, be sure to check out all the resources we have for you at the investorspodcast.com. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to the investorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP427: The History of Bubbles, Mania & Fraud w/ Jamie Catherwood

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