“But the most absurd and preposterous of all, and which showed more completely than any other, the utter madness of the people, was one, started by an unknown adventurer entitled ‘Company for carrying on an undertaking of great advantage, but nobody to know what it is.'”
The above quote is by Charles Mackay from a book about market psychology titled, Extraordinary Popular Delusions and the Madness of Crowds, published in 1841.
How many of you have read a book written in 1841 that is still in print and still pertinent? I have known about this book for a long time and finally decided to read it given we seem to be experiencing multiple concurrent delusions, not just financial ones. I will reference the book more in the future, but suffice it to say that Mr. Mackay investigated the history of delusions and concluded they had occurred for centuries and will occur for centuries into the future. We’re two centuries into his future and they still seem to be occurring.
The referenced company came at the height of the South Sea Bubble in 1719, with people lined up to participate in the promised 100 per cent annual return. What rational person would invest in such a company?
The book is challenging to read given how language has evolved over two centuries, but following is my brief summary. The bubble began when the South Sea Company purchased Britain’s debt for a promised six per cent annual interest payment. Nothing untoward there. It was also awarded exclusive rights to land at all the ports in South America. Everyone knew the vast wealth of silver and gold in the Americas but forgot one small detail — Spain controlled the ports. Along the lines of “never let the truth get in the way of a good story,” that didn’t dissuade those behind the story, including the British parliament, from wildly promoting the future success of the company. Its stock price skyrocketed and spawned a proliferation of new public companies in a mad dash for wealth. One hundred per cent annual return seemed to be the going promise.
Having written multiple times about speculations, I wanted to update an interesting data point. The technology sector of the S&P 500 now has $1,000,000,000,000 (one trillion) of market cap in money-losing technology companies, which are rising much faster than money-making companies. While this is only three per cent of the S&P’s current market cap it represents more value in money-losing tech than during the dot-com bubble of 1999, which the South Sea story reminded me of. And now there’s a new kid in town!
SPAC stands for special purpose acquisition company. The definition is a company with no commercial operations that is formed strictly to raise capital through an initial public offering for the purpose of acquiring an existing company, which is unknown at the time. Please reread the opening paragraph and as the once famous detergent ad asked, “Can you see the difference?”
To say they are new is slightly misleading, as they used to be called blind pools. As I understand it, the SPAC is formed by a sponsor fund manager, who provides the initial capital. They raise more from retail or institutional investors and upon achieving a predetermined goal, go on the hunt for an acquisition target. Once a target is in the crosshairs and with the initial enthusiasm of the kill, the sponsor normally sells its shares, also pocketing some outrageous fees. Normally, they purchase private companies as the avenue for taking them public. Retail investors (speculators) have generally not fared well.
You might think SPACs must be an unusual and unique situation. If 250 is unique, you would be correct. That’s the approximate number formed in 2020, collectively raising almost as much money as during the previous decade and representing about 50 per cent of all U.S. initial public offerings. Isn’t that fascinating?
Adding to my recent fearless predictions, I think the bubble in spec stocks could persist for some time for two reasons. Most of the 2020 SPACs still need to find their target, and the government continues to send free money to people, who seem to have taken up a hobby of trading specs in their internet brokerage accounts. When it ends, which it will, it is likely to be sudden and we’ll have a new generation of investors (speculators) swearing off stocks because they lost so much money.
As for my idiot son, we’ll get to him in the next instalment.