TSLA Tesla Inc

By Jason Zweig 

Back in Business is a new, occasional column that puts the present day in perspective by looking at business history and those who shaped it. Read the first installment here. Mr. Zweig's Intelligent Investor column will return next week.

A hot stock doubles and then doubles again in a matter of weeks. Thousands of people who have never invested in their lives suddenly try to beat the market.

That isn't just a description of Tesla Inc. and day-trading customers of the Robinhood smartphone app in 2020. It's also what happened in 1720. Three hundred years ago, one of the biggest manias in financial history was at its peak.

In the summer of 1720, shares in the South Sea Co. and other leading stocks roared to all-time highs as speculators chased instant profits. Ever since, this sudden outbreak of stock trading has been known as " the South Sea bubble." Even faster than it inflated, it burst -- and left us with lessons about human nature that reverberate today.

From July 10 through July 12, 1720, South Sea shares perched at GBP950, up 650% for the year. Royal Exchange Assurance and London Assurance crested in late August, up an astonishing 1,243% and 4,220% for the year, respectively.

Then, in three catastrophic weeks in September, it all began crashing down. By the end of 1720, these leading stocks had fallen between 81% and 96% from their peak.

The losses were devastating because speculating had been so popular.

King George I, half the members of Parliament, Sir Isaac Newton, the poet Alexander Pope, and countless merchants and tradesmen had speculated on the South Sea and other companies.

They all were sucked in by a perfect magnetic storm: the rapid advent of newspapers, ready loans at low interest rates, and exciting narratives about technological innovation. Above all was the eternal human desire to be part of the in crowd, or what we today would call FOMO, fear of missing out. "Our species is really a herd animal," says Andrew Odlyzko, a mathematician at the University of Minnesota who researches financial bubbles.

Bubbles are as old as financial markets. Even in ancient Babylon, commodity prices took sudden leaps and falls that can't be fully explained by weather or war.

In 1720, "the scent of money was in the air like the breath of spring," as the historian John Carswell put it. That June alone, 88 startups, most of them publicly traded, were launched in London. Many sought to raise GBP1,000,000 to GBP5,000,000 apiece (roughly $190 million to $945 million in today's money), tapping into what Daniel Defoe, author of "Robinson Crusoe," called " the general projecting humor of the nation."

A London housekeeper reportedly racked up GBP8,000 in gains, at least $1.5 million in today's money. Fistfights broke out over the right to buy stock while it still could be had; speculators thronged London's financial district to buy shares in any company, desperately pleading, " we don't care what it is."

Financial bubbles are often cited as proof of irrationality, but what they prove is that investors are human. As one formerly cautious banker, throwing some of his own money into the South Sea, pointed out on June 18, 1720: "When the rest of the world is mad we must imitate them in some measure."

New media technologies -- newspapers in 1720, radio in the 1920s, the internet in the 1990s, social media and smartphone apps today -- are "the cultural substrate in which a mania can grow," says William Deringer, a financial historian at the Massachusetts Institute of Technology.

As word spreads that "everybody" is doing something, it can be hard for anybody to resist joining. Humans have a profound need to belong to a group. Investing in something popular makes us feel popular.

In 18th-century London, coffee houses and ballrooms became centers of market gossip. One woman wrote: "South Sea is all the talk and fashion. The ladies sell their jewels to buy, and happy are they that are in... Never was such a time to get money as now."

Two centuries later, the financial analyst Benjamin Graham wrote about the bull market that ended in the crash of 1929: "Countless people asked themselves, 'Why work for a living when a fortune can be made in Wall Street without working?'" Graham added wryly, "The ensuing migration from business into the financial district resembled the famous gold rush to the Klondike, with the not unimportant difference that there really was gold in the Klondike."

Today, the online platform Reddit teems with speculators boasting about their biggest trades.

Imitation isn't always irrational, either. It helped our ancestors save mental and physical labor and adapt more quickly to changing environments, says William Bernstein, a neurologist and author of the forthcoming book "The Delusions of Crowds." Seeing many others invest in something sends a powerful, if often inaccurate, signal that it might be a good idea.

That can quickly coalesce into a narrative, in which our imaginations rapidly transport us to different places and times. ("I'll become rich, just like they did.") A good story, as the poet Samuel Taylor Coleridge wrote, automatically triggers a " willing suspension of disbelief for the moment."

The South Sea bubble brimmed with "story stocks." Among them were firms claiming they would "trade in hair," import " a number of large jack-asses from Spain," develop an " air pump for the brain," convert sewage into gunpowder and even conduct an unspecified business that would somehow "turn to the advantage" of its investors.The South Sea Co. had its own story: Originally created to sell enslaved people to Spain's American colonies, by 1720 it had morphed into a complex scheme for refinancing the British government's massive war debts. Attracting investments from the British public was key to making the scheme work -- or at least appear to work. (In the end it failed, casting a pall over the British economy for years to come.)

Investors today are barely wiser. Only last year, private funds valued WeWork, the office-sharing company that claimed it would " elevate the world's consciousness," at $47 billion. It was later marked down by roughly 80%.

The South Sea bubble did have many critics at the time. But conformity is a powerful force that can counteract gravity for longer than skeptics often expect. Bubbles are neither rational nor irrational; they are profoundly human, and they will always be with us.

Write to Jason Zweig at intelligentinvestor@wsj.com

(END) Dow Jones Newswires

July 17, 2020 10:15 ET (14:15 GMT)

Tesla (NASDAQ:TSLA)
Historical Stock Chart
From Mar 2024 to Apr 2024

Tesla (NASDAQ:TSLA)
Historical Stock Chart
From Apr 2023 to Apr 2024