Tuesday, April 26, 2011

Evil speculators

I'll bet that it is possible to find people asserting that speculation was anathema to the solid Victorian capitalist investors, who put their money into ventures looking for long-term dividends and profits. Moreover, I'll bet they say that speculation was bad for economic growth and deprived solid industries of capital. It would be dangerous for me to assign a political colour to that opinion, not least because anti-speculator populism can be found throughout the political spectrum.

Many Victorian investors, of course, were long-term in their point of view, and that investment theory has echoes in my own approach to investing which emphasises what one might term a 'get rich slowly' attitude: buy shares in good, reliable companies paying a decent dividend and wait for the money to roll in. Nevertheless, it is amusing to read the following conclusion of a review of investment in late Victorian mining stocks, given the evils which are laid at the door of modern speculators.

There is clear evidence in the mining sectors that as the metropolitan capital market emerged as a national and international force in the late nineteenth century, many of its leading players were more interested in the short-term manipulation of wealth, through speculation and share-dealing, than in long-term wealth creation, through careful investment in legitimate enterprise. (p. 731)
Truly, there is nothing new under the sun! Speculation has been in the capital markets for as long as they have existed (of course, the South Sea Bubble proves this amply well), and far from ruining us it appears to have been helpful. Certainly, it did no lasting harm to our industrial prospects:
Undoubtedly, far more money was lost in this [speculative] market than ever was made from it, but it was not necessarily lost to the industry. (p. 723, emph. orig.)
Speculators were, and remain, an important part of a well-functioning market for getting capital to enterprises. Mind you, as the latter quote makes clear, you have to be foolhardy to try it, but be glad! there is a market even for fools. For every so often, the speculator hits on a decent proposition and makes a small fortune. After all, this is pretty much the only way that speculators can be encouraged to enter the market; and without the speculator, far fewer investment propositions would be funded than are. We would have far fewer success stories without speculators and venture capitalists, and the stories of failure which accompany them are necessary by-products of the experimental laboratory which is the capital market.

So next time you read populist of left or of right bashing speculators for doing the economy down, remember: they may be fools, but they're the sort of fools we need.

Quotes come from "Segmented Capital Markets and Patterns of Investment in Late Victorian Britain: Evidence from the Non-Ferrous Mining Industry", Burt, R: Econ. Hist. Rev., 51/4 Nov. 1998, pp. 709–733. (link)

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