Visualizing History

A Hand-Drawn Visualization of the US Economy from 1861 to 1935

I’d highly encourage you to flip through this whole book.

From the Archives

Every Man His Own Broker

This archival source serves as a guide to ‘Exchange Alley’ in the 18th century. This alley was where speculators and brokers traded back and forth in London. See how many of these rules and tips are still applicable today. I mean even the title of the book sounds like the DIY investor movement of recent years.

Important to note, that ‘s’ looks like ‘f’. Olde English and all that…

Sunday Reads

The Factor Archives: A History of Factor Investing

This week marked my first post in a series of 7 articles covering the history of factor investing.

“While they may not have been known by the same names, many modern investment factors have historical roots stretching back centuries. This series, The Factor Archives, provides historical context on the six factor themes underlying OSAM’s investment process.”

This introductory post covers the historical roots of systematic investing, and the lessons they offer for investors today. Next week’s post will cover a factor theme that has been all over the news recently: Shareholder Yield.

Handel and The Bank of England

Over the course of financial history, one thing is abundantly clear: Expertise is one field does not translate to others. HOWEVER, every now and then, we find an exception to this rule…

“George Frideric Handel was a master musician — an internationally renowned composer, virtuoso performer, and music director of London’s Royal Academy of Music, one of Europe’s most prestigious opera houses.”

He was also a speculator in the South Sea Bubble, and not a bad one, either.

“Overall, Handel timed his market moves fairly well and did not lose money from his holdings of South Sea stock. He sold at least £300 of shares before the crash as the stock was rising (presumably at substantial profit), holding only £150 or £200 in shares at the time the Bubble burst in 1720, and, after the dividends and 50/50 division between equity shares and the new annuity, was still holding £150 in shares in 1723. He must have come out even or ahead when he ultimately sold his holdings.”

Happy Hour Followed by Hangover: Financing the UK Brewing Industry

“The brewing industry enjoyed a ‘happy hour’ in the last 15 years of the 19th century, with a 25-fold increase in brewery listings and an 82-fold increase in brewery capitalization.”

We’ve all been there… an innocent Happy Hour after work on Thursday turns into a late night that is very much regretted when strolling into work hungover the following day. Well, the brewing industry in the late 19th and early 20th centuries in England is a perfect analogy for this feeling. What started as booming happy hours in 1886 – 1890 & 1895 – 1900, turned into a hangover after 1900.

In 1885 there were only 12 incorporated breweries with securities traded on a stock market with a total paid-up capital of about £2 million, but by 1900, there were 308 breweries, with a total paid-up capital of over £165 million.”

The two booms were not necessarily similar, however.

“The first expansion phase was mainly financed by equity capital, whereas the 1894-9 boom was financed more by debt than equity finance. Indeed, the mean debt-to-equity ratio in 1900 meant that for every £100 of equity finance, breweries carried £86 of debt – these were highly-leveraged companies.

The authors give four reasons for why studying this period is interesting for investors and historians today:

  1. Measuring the relationship between family ownership and share performance.
  2. Previously, most of the companies going public in Britain were new ventures, but in the case of Breweries, most of them were existing private companies ‘converting’ to public ones. “Thus, the brewery industry was a central defining influence at the genesis of the modern-day initial public offering.”
  3. “The brewing industry presents us with a case study of the role of credit in sustaining asset price booms.”
  4. The brewer industry is also a fascinating look at the impact of social movements and regulation on stock prices (the temperance movement).


One very interesting reason that may have caused brewers to go public was…

“It ensured the spread of ownership in a controversial industry – tens of thousands of small investors had a stake rather than a small number of prosperous brewers. This may have helped influence public support for the industry and at the same time made it more difficult for politicians to attack it. Notably, shareholders were encouraged to lobby MPs and to vote against pro-temperance candidates in general elections.”

Corporate Profiles

The paper states that there were essentially three types of brewery companies:

  • (A) Breweries which were closely held and 40 per cent or more of their capital structure was debt;
  • (b) Breweries which had relatively diffuse ownership and very little in the way of debenture finance; and
  • (c) Breweries with relatively diffuse ownership and which had a capital structure consisting of circa 40 per cent debentures.

The author’s argue that most companies fell into the first category.

Investor Returns

“If an investor had held a weighted portfolio of brewery ordinary shares from 1878 to 1913, the total return they would have earned would have narrowly underperformed the overall market. However, the weighted total returns are being driven by Guinness, the largest and most successful brewery of the era; when Guinness is excluded, the terminal point of the index of ordinary brewery shares is 1.59 rather than 4.36. The performance of the breweries relative to the market was poor given the greater riskiness of brewery ordinary shares as manifested in higher standard deviations of returns on brewery ordinary shares than on the market. Notably, the equally-weighted (or unweighted) total returns in Figure 5 reveal that the overall market outperformed the brewery sector and, as can be seen from the standard deviations in Table 4, was also less risky.”

But what caused the hangover?

“Beer consumption fell every year from 1899 to 1909 and by close to 14 per cent over the decade. This largely reflected pressures on working-class standards of living as well as a decline in the popularity of public houses due to the rise of alternative sources of working-class entertainment. In addition, the development of tram networks resulted in a growth of suburbs and a concomitant decline in use of central London pubs.”

However, like a college kid looking to beat a hangover, we can’t forget about the ‘the hair of the dog‘, as shares shirked their hangover, and rebounded in 1910:

“Notably, when the standard of living improved for the working classes after 1909, there was a revival in beer consumption, with consumption increasing by the not insubstantial amount of three million barrels between 1909 and 1913. This increase in consumption is associated with the improvement in the performance of brewery ordinary and preference shares between 1910 and 1913.”

The Role of the Media in a Bubble

Financial media outlets get a lot of shtick these days for negatively influencing investor’s behavior, and perhaps exacerbating market panics with overly ominous headlines. Robert Shiller has even argued that the media are:

“Fundamental propagators of speculative price movements through their efforts to make news interesting to their audience.”

This paper studies this phenomenon in the British Railway mania of the 19th century.

“We examine the role of the news media during the British Railway Mania, arguably one of  the largest financial bubbles in history. Our analysis suggests that the press responded to changes in the stock market, and its reporting of recent events may have influenced asset prices. However, we find no evidence that the sentiment of the media, or the attention which it gave to particular stocks, had any influence on exacerbating or ending the Mania. The main contribution of the media was to provide factual information which investors could use to inform their decisions.”

Using sentiment analysis, this study pores through hundreds of news articles and newspapers to gauge the potential impact of media on stock returns during the Railway Mania.

“Our results suggest that the media may have been affected by stock returns, and that media reporting of recent events may have had an influence on stock prices. However, of most interest is the finding that the sentiment of the media had no impact in hyping railway stock prices, and cannot be blamed for exacerbating the Mania for investing in railway shares.”

Interestingly, however:

“Perhaps of more interest with regards the relationship between the media and a bubble, the results also imply that individual stocks were not successfully hyped by the media. Although those firms which received the most coverage tended to earn higher returns, this was due to standard risk factors, and not due to a psychological bias on the part of investors which could have led to certain stocks being more sought after simply because they received more attention.

In conclusion, the authors reiterate that the media was not to blame for this speculative mania.

“Our evidence suggests that the media did not play a major role in propagating (or bringing to an end) one of the ‘greatest bubbles in history’. The editorial content of the railway specific media did not boost stock returns during the boom, and the opinion pieces of The Times and the Economist did not cause the market crash. Although those companies which received greater coverage also experienced a greater price reversal, this was primarily due to other risk factors. The media may have played some role in the Mania by disseminating information, but it had little influence on investors via its editorial opinion pieces.”

The Ultimate Sin Stocks

If you think Altria is a sin stock, try wrapping your head around these companies in Germany that bet on Hitler’s rise to power…

“This paper examines the value of connections between German industry and the Nazi movement in early 1933. Drawing on previously unused contemporary sources about management and supervisory board composition and stock returns, we find that one out of seven firms, and a large proportion of the biggest companies, had substantive links with the National Socialist German Workers’ Party. Firms supporting the Nazi movement experienced unusually high returns, outperforming unconnected ones by 5% to 8% between January and March 1933. These results are not driven by sectoral composition and are robust to alternative estimators and definitions of affiliation.”

For more on how the Nazi regime affected investors, read my article here.