Devil Take the Hindmost | Edward Chancellor

Summary of: Devil Take the Hindmost: A History of Financial Speculation
By: Edward Chancellor

Introduction

Embark on a fascinating journey through the history of financial speculation with Edward Chancellor’s book ‘Devil Take the Hindmost’. This book takes you back to ancient Rome, where the earliest forms of speculation began, and reveals how these practices have continued throughout history. Delve deeper into the intriguing world of financial bubbles, vividly illustrated by examples like the Dutch ‘Tulip Mania’, the South Sea Scheme, and the stock market crash of 1929. As you explore the striking similarities between past and present speculative manias, the book unveils how these speculative tendencies are rooted in the pursuit of quick gains, overlooking traditional risk analysis. Prepare to uncover valuable insights and lessons from the history of speculation, potentially informing your understanding of today’s investment landscape.

The Psychology of Speculation

Speculation involves pursuing short-term opportunities and forecasting the market’s psychology. This behavior can be highly addictive and resembles gambling, leading investors to follow a herd mentality that risks traditional risk analysis. Speculative manias occur when a new industry or technology is overestimated, and too much capital is attracted to new ventures. Investors today are pursuing the Internet in the same way they pursued land, gold, and railroads in the past. To differentiate from speculation, investment aims to prevent a lot of money from becoming little.

A Historical Account of Speculation

This captivating summary takes us on a journey through the history of speculation, from ancient Rome through the tulip mania to the modern era. Through the ages, stock prices have fluctuated based on economic and social factors, but the pattern of speculative manias remains the same. As people overestimate the potential new gains and too much capital is attracted to new ventures, stock prices soar, leading to speculation bubbles that inevitably burst. These manias are often prompted by the inception of a new industry or technology. Whether it’s government securities in the fourteenth century or internet stocks in the twenty-first, the euphoria and subsequent bust of speculation remain consistent, reminding us that history has much to teach us about the nature of financial markets.

The Rise and Fall of Stock Market Speculation

The emergence of the stock market in London in the late 17th century brought about a significant era of speculation, with writers recognizing the similarities between gambling and investing. Fraud, known as stock jobbing, arose and led to the 1697 economic crisis, with 70% of all English and Scottish companies failing. This pattern persisted throughout history, where investor optimism was inflated, and only promoters and stock operators profited. The South Sea scheme and the Mississippi scheme were launched, substituting paper currency for gold and inflating the shares’ value. In the South Sea scheme, the government debt was converted to stock in a company that took over government debt, which created an inflationary spiral for their respective shares. The share prices were manipulated through loans to shareholders, and the company used stock proceeds to lend money to allow new investors to purchase stock at higher prices. Eventually, investor irrationality and company greed created an unstable condition, and just before the stock collapsed, the company offered a 50% dividend to encourage subscription sales. By September, the stock price fell from 800 pounds to less than 200 pounds in four weeks, and the bubble collapsed as quickly as it developed.

The Railway Mania Bubble

In the 1840s, a bubble of railway mania occurred as writers proclaimed the revolutionary effect railways would have on human civilization. By 1845, sixteen new railway schemes were proposed, and more than 50 new companies registered. Many subscribers purchased subscriptions beyond their means, hoping to sell them before taking possession of their shares. The speculative behavior was denounced by writers, and in 1848, the bubble burst. A parliamentary report identified more than 20,000 stock subscribers, but the market value depended on how far circumstances would sustain or increase public appetite for speculation.

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