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Quote of the Day

“…the dangerous practice of stock-jobbing, and would divert the genius of the nation from trade and industry. It would hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labour for a prospect of imaginary wealth. The great principal of the project was an evil of first-rate magnitude; it was to raise artificially the value of the stock, by exciting and keeping up a general infatuation, and by promising dividends out of funds which could never be adequate to the purpose.”

-Mr Robert Walpole, member of the House of Commons, speaking against a law benefiting the South Sea Company in February 1720.

Source: Extraordinary Popular Delusions and the Madness of Crowds

 

August 22nd – This Day in Stock Market History

August 22nd, 1720 – South Sea Company has its fourth stock offering to the public, selling 10,000 shares at 1,000 pounds each.

The shares sold out by 1 o’clock. Unfortunately for investors, it would turn out that South Sea Company shares had peaked weeks earlier at 1,050.

Within 4 weeks, the price of a share of South Sea Company would be 200, down 75%.

Source: Devil Take the Hindmost

By late August 1720 the South Sea Company was rapidly in decline as the government and its people become suspicious of the countless “bubble companies” that were popping up. Months earlier, in order to attract investors and maintain its share price, the company announced a 30% dividend with a promise of increasing it to 50% in 12 months. The company needed a high share price to sell new shares at to maintain its promise. However people were slowly beginning to see through the hype and the South Sea Company bubble was about to burst. The South Sea Company would have only weeks left before its shareholders would be ruined.

To this day, the “South Sea Bubble” is one of the most famous financial bubbles in history.

August 22nd, 1902 – Cadillac Motor Company is formed.

The company was formed from the remaining assets of Henry Ford Company after Ford left the company due to a disagreement with his investors.

Therefore, it is no surprise that Cadillac’s first car looked pretty similar to Ford’s Model A:

The company would be purchased by General Motors in 1909. Ford would go on to found the Ford Motor Company June 16th, 1903.

Best August 22nd in Dow Jones Industrial Average History

1932 – Up 5.32%, 3.69 points.

Worst August 22nd in Dow Jones Industrial Average History

1917 – Down 1.75%, 1.59 points.

Read of the Day

The South Sea Company was responsible for creating a lot of wealth for some, and destroying a lot for others. One of the most famous of those caught up in the South Sea bubble was Isaac Newton, who lost thousands in the collapse. From the commentary by Jason Zweig in the latest edition of The Intelligent Investor:

“back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people’.”

“Newton dumped his South Sea shares, pocketed a 100% profit totaling  £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price – and lost £20,000  (or more than $3 million in today’s money). For the rest of his life, he forbade anyone to speak the words ‘South Sea’ in his presence.”

“Sir Isaac Newton was one of the most intelligent people who ever lived, as most of us would define intelligence. But, in Graham’s terms, Newton was far from an intelligent investor. By letting the roar of the crowd override his own judgment, the world’s greatest scientist acted like a fool.
“In short, if you failed at investing so far, it’s not because you are stupid. It’s because, like Sir Isaac Newton, you haven’t developed the emotional discipline that successful investing requires.”

<– Go To Previous Day: August 21st, 1998: As Russian crisis worsens – Failing hedge fund Long Term Capital Management loses $553 million on this day alone.

Go To Next Day: August 23rd, 1976: Vanguard launches the first retail index fund, ‘First Investment Trust’ –>