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Quote of the Day

“Of all the get-rich-quick magnates that have operated, Ponzi is the king.”

– Mitchell Zuckoff , from his book, Ponzi’s Scheme: The True Story of a Financial Legend

August 12th – This Day in Stock Market History

August 12th, 1920 – Charles Ponzi arrested.

Ponzi’s arrest came about 1 year after he started his investment fund, which may have had an innocent intent initially. Ponzi’s plan was to profit from the arbitrage of IRCs, or an International Reply Coupon and various countries postage rates.

The coupons were effectively prepaid letters that could also be redeemed for postage stamps. In Ponzi’s mind, if he could buy IRCs at a country with a lower postage rate, and bring them to another country with a higher postage rate, he could make money on the difference.

Ponzi started his company, ‘The Securities Exchange Company’, and began marketing his plan promising 100% returns in 90 days. In the first month of his venture 18 investors gave Ponzi $1,800 dollars, and each were paid their profits with future investors’ money.

As word spread of Ponzi’s success, more and more investors joined in.

By July 1920, it is estimated Ponzi was getting nearly $1 million dollars a day in new investments.

But, the fund would soon come crashing down. A few sceptical newspaper reporters began publishing articles doubting Ponzi’s returns (and determining that it would take several titanic-sized boats all filled with IRCs to produce enough profit for just a fraction of his investors!).

As skepticism set in, investors began to cash out their investments. Ponzi’s bank account would be drained in a matter of 2 weeks.

Ponzi had also been heavily borrowing from banks to help fund investor redemption. When Ponzi’s fraud was announced, it would bring down 5 banks, most notably the Hanover Trust.

In total, about $20 million dollars would be lost to Ponzi’s scheme. And today, Charles Ponzi’s name is used to identify frauds who attempt the same scheme – a “Ponzi Scheme”.

Most notably Bernard Madoff, who conned investors out of nearly $18 billion dollars in 2008. Bernie Madoff would be arrested December 11th, 2008.

Source: Manias, Panics and Crashes: A History of Financial Crisis

August 20th, 1981 – IBM announces plan to sell a desktop computer.

The first IBM personal computer, known as the IBM Model 5150, had an 4.77 MHz Intel 8088 processor and used Microsoft´s MS-DOS as an operating system.

The computer would start at $1,565 dollars (equivalent to more than $4,300 today!)

The computer would be a huge success for IBM, and be a tremendous benefit for a rapidly growing software company – Microsoft.

Source: Hard Drive: Bill Gates and the Making of the Microsoft Empire

and IBM Archives.

August 12, 1982 – Mexico declares a moratorium on its debt, igniting a financial panic that would last over a decade.

The move would embolden other countries struggling with their own debt. Over the next year, $250 billion in debt from 27 different countries was in default.

Mexico’s fiscal problems would take a decade to solve, with help from the Brady bill and inflation rates in Mexico that touched 100% by the early 90s.

The international turmoil would hit American stock markets as well, on this day the Dow Jones Industrial Average would reach a 30-year low after adjusting for inflation:

Source of chart: MacroTrends

Source: Panic, Prosperity, and Progress: Five Centuries of History and the Markets

Best August 12th in Dow Jones Industrial Average History

1903 – Up 3.37%, 1.20 points.

Worst August 12th in Dow Jones Industrial Average History

1932 – Down 8.40%, 5.79 points.

Read of the Day

On this day in 1981, the success of IBM’s personal computer running Microsoft’s software would help ignite growth at a young software company Microsoft, led by Bill Gates.

Of course, decades later, Bill Gates has left his role at Microsoft and is working on his charity, the Bill and Melinda Gates Foundation. I find his notes and work very interesting:

In 1918, the Spanish flu killed 50 million people worldwide. It still ranks as one of the deadliest natural disasters ever.

… Today a flu as contagious and lethal as the 1918 one would kill nearly 33 million people in just six months.

Go To Next Day: August 13th, 1998 – Russia Announces Capital Controls on the Ruble –>