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Joseph De La Vega’s Confusion De Confusiones is the earliest known book on the trading practices of a stock market. Set as four separate conversations between three people, you get a sense of what investing and speculating was like in the mid to late 1600s.
- On stock markets: “…this enigmatic business which is at once fairest and most deceitful in Europe, the noblest and the most infamous in the world, the finest and the most vulgar on earth. It is a quintessence of academic learning and a paragon of fraudulence; it is a touchstone for the intelligent and a tombstone for the audacious, a treasury of usefulness and a source of disaster, and finally a counterpart of Sisyphus who never rests as also of Ixion who is chained to a wheel that turns perpetually.”
- “…you will see that the stocks do not merely exist for fools but also for intelligent people.”
- The Dutch East India Company is the primary stock mentioned throughout the text. Established in 1602 by several merchants, the company was divided into shares. All profits were reinvested back into the company until 1612 when the first dividend was distributed. From founding to 1688 (publishing of the book) dividends payment amounted to 1,482.5% while stock price increased more than 5-fold. The author compares that return to a tree.
- “This treasure is compared to a tree, because it yields fruit [almost] every year, and, although during some years it has only produced blossoms, there have been other years when it has resembled the trees of Uraba which display their fruitfulness two or three times a year, and which competed with the Sibylines whose branches were of gold and whose leaves were of emeralds… However, I have come to see that it resembles the tree of life, because innumerable men earn their living in its shadow. And those who are satisfied with the fruits, and do not insist on pulling up the roots…will admit that they do pretty well in such a business.”
- Three types of people are found at the stock market: the investors (“financial lords”), the merchants, and the speculators. In time, some merchants became speculators and some speculators become gamblers as people began treating it like a game.
- The investors don’t care about price fluctuation as long they earn their dividends. — “They do not care about the movements in the price of the stock. Since their interest lies not in the sale of the stock but in the revenues secured through the dividends, the higher value of the shares forms only an imaginary enjoyment for them, arising from the reflection…that they could in truth obtain a high price if they were to sell their shares.”
- The merchants seem to be more concerned with capital gains, trying to time the market based on changes in the news. — “They consider their risk as much as their profit; they prefer to gain little, but to gain that little with [relative] security; to incur no risk other than the solvency of the other party in this forward contract; and to have no worries other than those bound up with unforeseen events.”
- The speculators and gambles are the get-rich-quick crowds, with different schemes to move prices to their benefit.
- “When a loss occurs, the losers are expected to pay at least what they have available at the moment, and it might be expected that, as the would is fresh, there would be no new injury. But thought the proverb “He who once is intoxicated…” condemns such goings-on, emotion has greater power than the warning of proverbs; gullibility and seduction cannot in any way be prevented.”
- The author, through the Shareholder character, goes through an extended explanation of using options or “opsies” — “…through the payment of premiums, one hands over values in order to safeguard one’s stocks or to obtain a profit. One uses them as sails for a happy voyage during a beneficent conjuncture and as an anchor of security in a storm.”
- Then, like today, markets move on news and “opinion on the stock exchange itself.” And the news wasn’t very useful back then either: “For this last reason the news [as such] is often of little value, since counteracting forces [may] operate in the opposite direction.”
- The four principles in speculation:
- “Never give anyone the advice to buy or sell shares, because, where perspicacity is weakened, the most benevolent piece of advice can turn out badly.”
- “Take every gain without showing remorse about missed profits, because an eel may escape sooner than you think. It is wise to enjoy that which is possible without hoping for the continuance of a favorable conjuncture and the persistence of good luck.”
- “Profits on the exchange are the treasures of goblins. At one time they may be carbuncle stones, then coals, then diamonds, then flint-stones, then morning dew, then tears.”
- “Whoever wishes to win in this game must have patience and money, since the values are so little constant and rumors so little founded on truth. He who knows how to endure blows without being terrified by the misfortunes resembles the lion who answers the thunder with a roar, and is unlike the hind who, stunned by the thunder, tries to flee… Owing to the vicissitudes, many people make themselves ridiculous because some speculators are guided by dreams, others by prophecies, these by illusions, those by moods, and innumerable men by chimeras.”
- Even then, a patient, unemotional, level headed investor who was willing to pay attention could place bets, be right more times than wrong, and come out ahead.
- The Shareholder character goes on a long diatribe on a certain group of gamblers devoted to being either bulls or bears — “…in this gambling hell there are two classes of speculators who are so opposed to one another that they represent antipodes in their decisions and, as I believe, in their destinies.” The bulls always look for a rise in prices, bears always look for a fall. But if you want to be successful, you have to stay independent and play either roles as it suits you.
- Interest rates on loans in 1688 were 3% or 2.5% with collateral. The low rates pushed wealthy people to buy stocks, rather than loan money.
- “The fall of prices need not have a limit, and there are also unlimited possibilities for a rise.”
- “The expectation of an event creates a much deeper impression upon the exchange than the event itself.”
- “…the speculator fights his own good sense, struggles against his own will, counteracts his own hope, acts against his own comfort, and is at odds with his own decisions… There are many occasions in which every speculator seems to have two bodies so that astonished observes see a human being fighting himself.”
- “‘Look after that which concerns you’ is the advice of a prudent man.”
- Demand for Dutch East India stock was so high that whole shares were first split into smaller shares called “ducaton shares” in 1683. Much like unit trusts created to “give smaller investors access” to Berkshire Hathaway’s high priced A Shares in the 1990s (before the B shares were issued), ducaton shares made it easier for more people to own East India stock that would normally be unable to afford it. This was done for a fee, of course, with monthly settlement dates. Ducaton shares would sometimes trade at a premium (or discount) to the whole shares, creating an arbitrage opportunity for those who could afford whole shares. The practice became so popular that exuberance and panics were common.
- Herd behavior: “As there are so many people who cannot wait to follow the prevailing trend of opinion, I am not surprised that a small group becomes an army. [Most people] think only of doing what the others do and of following their example…”
- The total lack of regulations meant it was like the Wild West of stock markets. Groups of speculators would gang up using a number of schemes (the book offers 12 examples) to drive prices lower or higher in order to profit. It’s not unlike the schemes used during the pre-SEC days in U.S. markets.
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