Stock markets have a long history of fraud and grift during bull markets. Grifters find it easier to entice would-be “suckers” when everyone seems to be making a fortune but them. One such example took place at the start of the 1900s that has played out in some form or another in every bull market since.
Stock promotion was legal at the turn of the century. Promoters pumped new companies in order to raise money in exchange for a cut of the total take. In some cases, their cut was upwards of 40%. A promoter could walk away with over $100,000, on a $1,000,000 stock offering, after paying promotional fees for advertising and articles pumping the stock.
The 1901 stock promotion boom was the byproduct of a speculative bull market. Two years early a merger mania began as Wall Street power players combined railroad and industrial companies into regional and national monopolies. Speculators saw an opportunity to get rich quickly in the millions of new shares created by the mergers.
The mania briefly sputtered with the North Pacific panic before going wild in a stock promotion boom in 1901. Over the course of two years, hundreds of new companies were created and promoted to unwitting investors.
The majority of the promoted stocks were commodity-based. Literal gold mines promised a mother load. Oil companies guaranteed gushers. But there were also companies in copper, cattle, bananas, electricity, rubber tires, wireless telegraph, and the random oddball like the Automatic Bango Company.
The promoters, through newspaper ads, promised quick growth and huge returns.
- “History will not only repeat itself, but will surpass itself, in making fortunes for investors, as it did Bell Telephone stockholders, the profits of which to an original investor of $100 are more than $240,000 to date.”
- “I predict that this stock will soon advance 500 to 2,000 percent.”
- “One hundred percent profits guaranteed — a safe conservative investment.” — Montana-Idaho Mining & Development Company
- “The most profitable investment that can, at the beginning of the new century, be made.” — Las Animas Mining Company
- “We can show you how $100 in a safe, solid business enterprise can be made to earn 400 percent yearly profit.”
- “We predict 300 percent profit for the present investors within sixty days.”
- “Your investment will net 24 percent per annum. The man who puts his money into this proposition is not speculating. Far from it. He is investing in a certainty. All risk is over.”
- “Buy before the stock goes to gusher prices; we predict that this stock, bought now at five cents a share, will be selling at five hundred percent advance within three months.”
- “Not a speculation, but a safe, sure investment. The richest gold mine in Southern California, a proposition in which there is really no risk.” — Crystal Spring Mining & Milling Company
- “These shares will increase in a few years to twelve or fifteen times the par value.” — Mammoth Consolidated Gold Mining Company
- “A modest investment in this company insures a competence for life; the Eastern Consolidated Oil can make more than one percent a day net profit.”
You can find similar tactics still used today, like comparing a current stock’s trajectory to that of Amazon or Google or Apple. Nothing sells stocks more than claims of lottery-like returns on a “safe” stock issue.
However, a high monthly dividend was the key selling point for most issues in 1901. Comparing the high dividend yields to that of a meager savings account was common.
- “The company can earn $1,875,000 a year from copper alone at the present market price, from which fifty to seventy-five percent dividends can be paid. the investment is as safe as any savings bank, and promises a hundredfold the return.” — New York & Virginia Copper Company
- “Why speculate when you can make a safe investment that will pay over fifty percent the first year? We will pay from forty to fifty cents a share this year in dividends on stock now selling at seventy-five cents.” — Westerfield Mining Investment Company
- “Earn and pay continuously an annual dividend of sixty percent.” — Tidewater Cannel Coal Company
- “Controlling 240,000 acres of Idaho range; an investment as safe as a savings bank, paying from forty to seventy-five percent dividends absolutely secured.” — The Clover Leaf Cattle & Irrigation Company
- “Central Star can pay the present monthly dividend of two percent for years to come, and if it never adds another well to those already driven; its financial standing is vouched for by the strongest financial institutions in the country. Can you afford to accept a meager pittance of four percent a year, when your money will you twenty-four percent in the same time?”
- “Easily pay stockholders forty percent on their investment the first year, and sixty percent the second year.” — Sumatra Tobacco Growing Company
- “Permanently fixed on a dividend paying basis of twenty-four percent a year.” — Ohio Oil Company
- “Guaranteed fifteen percent stock. Safest and most promising investment of the new century. Secure a fortune by investing in oil.” — Pacific Oil Company
- “One of those large, safe, dividend earning enterprises, to continue for many years to come.” — Kendrick & Gelder Smelting Company
- “For the purposes of erecting a stamp mill [with] and earning capacity of $1,000 daily and enable it to pay five percent monthly.” — Ora Blanco Mining Company
The last one claimed a 5% dividend per month! 5% is slightly higher than what the average savings account paid per year at the time.
Most of these companies were no more than a Ponzi scheme. Early investors received dividends paid with money brought in from the sale of additional shares to new investors. The dividend was canceled immediately once all the shares were sold. Within a few years (or months), the company was gone.
In fact, a study done in 1906, by the journalist Frank Fayant, found 150 companies promoted in the New York Herald from 1901 to 1902.
How many of all these one hundred and fifty companies of 1901-02 are making money today and paying dividends to their stockholders? One — just one! Just one of these one hundred and fifty companies that sold many millions of dollars of stock to the public is today paying dividends. It has paid two dividends of one percent each this year, and its stock is selling in the open market at less than half what investors paid for it five years ago, although its promoters asserted then that “it is doubtful whether anything has ever been offered to the public for subscription which gives so much promise from so small an outlay.”
In all this brave array of wonderful ventures that were to make fortunes for the credulous, one company is paying a dividend — and a dividend smaller than that paid by the savings banks. One other is a going manufacturing concern, that ignores my requests for information; a third is a going real estate company, that repurchased from investors the stock sold to them; a fourth is a plantation company waiting for its rubber trees to grow up; two are struggling oil companies in need of money; eighteen are gold mines, still hoping to strike it rich, and nearly all are in need of money. Of the one hundred and twenty-six other ventures, twenty-two may be classed as moribund, while the remaining one hundred and four are dead and gone, forgotten by all but the investors who bravely put their money into them.
The 1901 promotion boom was one of a long line of bull markets that have been used to push questionable stocks onto the masses since the South Sea Bubble. It’s the perfect example of history and human nature repeating itself.
That said, two things are different. The ways of promotion have evolved with technology and what’s being promoted is often tied to the latest and greatest of innovations. But the results are the same. The promoters tell some tall tales, make a killing for themselves and the people behind the company, and the investors lose their shirts.
The recent bull market saw more of the same. It presented another opportunity for grifters to hock SPACs, ETFs (one in particular), crypto, stablecoins, and NFTs. Only this time social media amplified it.
Investors heard stories of wonderful possibilities and rising prices helped sell the claims. The fact that the companies and coins had little to no history probably made the stories more believable to some.
Investors are often attracted to the devil they don’t know rather than the devil they do to their own detriment. They reject the investments they know for the exciting new investments they know nothing about because the returns are potentially so much greater than what they’ve experienced before. They eventually learn that promises of high returns carry more risk than they could ever imagine.
The lesson from 1901 is to be skeptical. Making money in the market is never that easy. Claims of high returns with little to no risk are too good to be true.
Source:
Fools and Their Money, Success Magazine, 1906-1907
Related Reading:
A Short Tale of a Stock Promoter
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