Visualizing History 

United States Sectors 1800 to 2018

(Source: Global Financial Data)

From the Archives

While you should peruse the entire book and find a section that sounds interesting to you, I would highly encourage you to read this section on The Speculator vs. The Investor .

The Causes Influencing Investment & Speculation & the Fluctuations in Values (1885)

Sunday Reads

It is hard to overstate just how bizarre a year this has been in almost every facet of society and daily life.

Looking at the stock market in particular, the prevailing narrative has gone from one of euphoria to depression, then back to even higher levels of euphoria. Then, this week, we were reminded that beyond this euphoria eventually lies an inevitable depression.

Over the last few months, as a new army of day traders and speculators have charged into battle, I have written about the historical drivers of speculative booms, the relationship between speculation and innovation, and more. This week was a first battle for many soldiers in the day trading army as high-flying tech stocks stumbled. Below we’ll focus on one high flying stock in particular.

The Nikola Debacle

I’m going to use the recent controversy surrounding Nikola Motors as an analogy for the heightened levels of speculation and occasional instances of full-blown delusion that have grappled stock markets this year.

The whipsaw ride that was Nikola’s share price this week is a good representation of the recent uptick in market volatility more broadly. Bloomberg journalist Sarah Ponczek wrote:

“The tech-heavy Nasdaq 100 gave up a 1.5% rally to end down 2%, continuing a trend of outsize moves that have characterized trading this month. The index has moved more than 1% every day in September, the longest such streak since March, when stocks were nearing the end of their bear-market descent…unease was evident Thursday, as the Nasdaq 100, the focal point of the recent stock correction, staged a 0.7% intraday swing at least eight times.”

Nasdaq has moved more than 1% everyday so far this month

Nowhere was this volatility more apparent than the stock price of Nikola Motors. As demonstrated in the chart below, Nikola’s stock soared some 50% on Tuesday after General Motors and Nikola announced a new partnership worth $2 Billion, but the celebratory sentiment was short lived. By Friday the stock had plunged almost 36%. What the hell happened, you might wonder?

The Financial Times summarized Nikola’s wild week below:

“On Tuesday, the 38-year-old college dropout announced a $2bn partnership under which General Motors would build his company’s electric pick-up trucks… Shares in Mr Milton’s start-up, Nikola, jumped more than 50 per cent — although they didn’t return to their June high, when the company was briefly worth more than GM itself.

Yet 48 hours later, a report from Hindenburg Research called his company an ‘intricate fraud’. The allegations included claims that Nikola had faked product demonstrations and passed off other companies’ technology as its own. The stock gave up almost all this week’s gains…”

The most mind boggling aspect of the FT’s article, however, comes a little further down in the piece:

“Whether he [Nikola Founder Trevor Milton] has overstepped the line is less clear.

Nikola faked a video of one of its trucks by making it look like the vehicle was driving under its own power when it was really only rolling downhill, according to Hindenburg’s report — a claim backed up by FT reporting this week.

‘It was built to be a working prototype,’ Mr Russell [Nikola’s CEO] insists of the truck.

But did it actually work? His answer, after a long pause: ‘I wouldn’t comment on that’.”

Now I am not here to determine whether or not the content of Hindenburg Research’s report is 100% accurate, and it is worth noting the firm is short Nikola, but this part of their report stood out to me the most. Here’s the excerpt:

“2018: In Order to Continue the Appearance of Progress, Nikola Posted a YouTube Video of Its Nikola One “In Motion” on the Road.

Text Messages from a Former Employee Reveal the Truck Was Simply Filmed Rolling Down a Big Hill.  

As time passed and the hype from the December 2016 show faded with no major updates, skepticism began to mount about the Nikola One.

As shown above, no plans were in place to finish development of the Nikola One. Bosch, which had partnered with Nikola following the show, was still quite some time away from delivering working prototypes of Nikola’s next development.

To remedy this ‘hype gap’, Nikola teased a tweet on October 6th 2017 about an upcoming video:

The first video, which was finally released in January, was for major auto parts manufacturer Phillips, and showed a short clip of the Nikola One easing to a stop sign.

But the main event was another video, entitled “Nikola One in Motion” released the next day on Nikola’s corporate YouTube account and promoted on social media, garnering 230,000 views on Facebook alone. This video appeared to show the truck driving on a level road at a high rate of speed.

The video generated a tremendous amount of buzz and excitement about the pre-production units to be released the following year (which never happened).

But according to a former employee who spoke with Nikola Chief Engineer Kevin Lynk, the video was simply the result of Nikola towing the truck to the top of a hill and rolling it down.

The deception involved in the production of this video appears to have been elaborate. The company scouted a remote section of road on the Mormon Trail just to the south of Grantsville, Utah, which we have since located.  This section of road is lightly used and features a 2-mile-long perfectly straight stretch with a consistent 3 percent grade–plenty of length and enough of a slope to get a motorless truck rolling.”

WHAT?! So, just to reiterate, the Financial Times confirmed the allegation in Hindenburg Research’s report that Nikola had faked its video of a “fully functional” Nikola truck “driving” on the open road. In reality, it was coasting down a slight hill in neutral…

To be honest though, a story like this doesn’t feel that bizarre in a year when the market doesn’t seem too bothered by fundamentals. Even if the video of the truck driving was real, the behavior of Nikola’s stock price would still be ridiculous. The company reported revenues (not income, revenues) of a meager $36,000 last quarter, yet the stock had soared as high as $80 this year. Madness.

This Nikola video serves as an interesting analogy for the market as a whole in recent months. As speculation boomed and inexperienced traders were lured into the market by a false sense of getting rich quick, the market has felt like one driven much less by fundamentals, but by flashy narratives and hype.

The Nikola truck appeared to be propelled by the strength of its underlying engine, but in reality the flashy hype and editing obfuscated the fact that it was merely rolling downhill by the power of its own weight. The market has similarly propelled itself higher in recent months, but like the Nikola truck in that video, the underlying force powering this movement was not a traditional engine (fundamentals, earnings, etc.), but exciting narratives and speculation.

As long as they are both still moving it doesn’t matter in the short term what that Nikola truck or the stock market is being propelled by – they’re moving.

Eventually, however, the Nikola truck reaches the end of the incline and can no longer coast in neutral. Eventually, the stock market has to be driven by fundamentals and actual earnings rather than hype and optimistic narratives.

The Keely Motor Company

Keely’s Perpetual Motion Machine

The faked Nikola video is very reminiscent of a 19th century motor company that I wrote about a few years ago. Here’s an excerpt:

“In 1872, John W. Keely, founder of the Keely Motor Company (KMC), announced his newly invented ‘Perpetual Motion’ machine. According to Keely, the machine was capable of providing a new form of energy at an astonishingly low cost. Not lacking bravado, the charismatic founder boldly claimed that his invention could fuel a round trip train journey from New York to San Francisco using just one quart of water. Furthermore, a single gallon of water could allegedly power a steamship’s voyage from New York to Liverpool, and back.

Unsurprisingly, Keely’s grandiose ambitions attracted investments from around the country. Within a year, Keely had garnered a substantial war chest from investors that were swept up by the inventor’s outlandish promises. The only problem, however, was that the Keely Motor Company proved to be an elaborate fraud.

Far from successfully inventing a revolutionary machine that would disrupt industries far and wide, Keely had in fact devised a contraption just sophisticated enough to fool those who witnessed his presentations.

Although many scientists at the time publicly questioned his inventions, Keely successfully evaded being exposed during his lifetime. Upon his death, investigators finally learned of his nefarious trickery as they scoured his laboratory.

According to the Philadelphia Press investigation in 1899, the Keely Motor Company:

Was composed of nearly all the fundamental tones of delusion that vibrate in ill-balanced mental systems: a revelation of nature’s mysteries, the stultifying of current science, a new mechanical contrivance to develop untold power…little more is needed to give Keelyism its proper place in a museum of pathological mental products.”

Most remarkably, over the 26-year period beginning with the founding of Keely’s company, until his death, John Keely never brought his product to market.

Despite the fact that he had first announced his invention in 1872, received investments from numerous wealthy individuals, and even publicly listed the company’s shares, the ‘Perpetual Motion’ machine never came to fruition.

“Managers are again applying the thumb-screw…threatening a suit for obtaining money under false pretenses, unless Mr. Keely renounces his plan of progressive research, and gives his time to the construction of engines for the Keely Motor Company”— Bloomfield Moore (1893)

One of Keely’s many tactics for diverting scrutiny from his ‘Perpetual Motion’ machine was to ‘wow’ investors with new inventions, and even more ambitious goals.

However, shareholders of the Keely Motor Company eventually grew weary of the inventor constantly announcing new inventions, since he had not yet completed the ‘Perpetual Motion’ machine that had originally prompted their investments.

Understandably, investors were frustrated that Keely repeatedly turned his attention to new projects, or further research instead of focusing on bringing his original machine to market. Eventually, this discontent resulted in a lawsuit against the evasive founder.”

The Keely Motor Company Board of Directors


The Broader Tech Plunge

After that lengthy section on Nikola, I want to touch upon the broader focus of today’s post: Tech stocks.

I was shocked to discover this, but turns out they can go down! Since my last Sunday Reads on August 30th, the NASDAQ 100 Index has fallen 8.5%. There have been a few fleeting signs that Big Tech could be falling out of favor during the pandemic that ultimately led to nothing, but this week still served as a good reminder that there may still be some darker days ahead in the market.

As James Mackintosh at the Wall Street Journal so perfectly described it:

There has been a lot of concern recently about the stock market being top-heavy, dominated by just a handful of companies, and that this might spell trouble for future returns. But really what we should worry about isn’t that the market is reliant on a few stocks. It’s that the market is reliant on a few very similar stocks

The danger now is that the market is overly reliant on a group of companies that are all a bet on disruptive innovation—the big five and a wider circle including other fast-expanding growth companies such as Netflix and Nvidia. They have thrived since the pandemic began because so much of their lifetime profits lie far in the future, meaning their valuations benefit from low rates while short-term pandemic-related hits matter less.

Anything that hurts this group could drag down the wider market, even if other stocks are fine.

Also, for anyone looking to learn more about the history of investing in new technologies, this is the must-read book:

Engines That Move Markets: Technology Investing from Railroads to the Internet and Beyond

And with that, let’s dive into today’s reads!

Who Panics During Panics? 19th Century Evidence

Over the course of the market downturn earlier this year, some commentators pointed out that retail investors have actually been buying equities instead of selling, primarily through low-cost index funds. This goes against the narrative that the dumb retail investors always sell out at the bottom and buy at the top. It will be interesting to see how the plethora of new “investors” touting their successful strategies on apps like TikTok fare as their popular tech stocks suffer declines. Who knows how they’ll react!

However, this begs the question, what does the long-term evidence show?

“Using records of the bank accounts of individual depositors, this paper provides a detailed micro-economic analysis of two nineteenth century banking panics. The panics of 1854 and 1857 were not characterized by an immediate mass panic of depositors and had important time dimensions. We examine depositor behavior using a hazard model. Contagion was the key factor in 1854 but it was not strong enough to create more than a local panic. In contrast, the panic of 1857 began with runs by businessmen and banking sophisticates followed by less informed depositors. Uninformed contagion may have been present, but the evidence suggests that this panic was driven by informational shocks in the face of asymmetric information about the true condition of bank portfolios.”

Using the accounts of customers at banks at the time, the paper specifically calls out what categories of people ‘panicked’ during the panics of 1854 and 1857:

The paper concludes that:

“Banking panics were not characterized by an immediate mass panic of depositors, and account closings were a modest fraction of all accounts. Although depositor behavior clearly changed quite rapidly, there were time dimensions to the panics. Account closings rise quickly, with distinct jumps in the number per day, often apparently influenced by news. The heterogeneous behavior of depositors allows us to see that there were elements of contagion and responses to dramatic news events. However, while contagion seems to have been present, it does not appear to be strong enough to drive the panic onwards in 1854, the one panic most likely to have been driven by pure uninformed contagion. The panic of 1857 appears more likely to have been led by business leaders and banking sophisticates followed by less informed depositors. Uninformed contagion may be present, but the evidence suggests that the run on the banks was driven by informational shocks in the face of asymmetric information about the true condition of bank portfolios.”

Does Credit Affect Stock Trading? Evidence From the South Sea Bubble

One of the interesting aspects of recent speculation in technology stocks has been the retail investor’s increasingly active participation in options markets. Jason Zweig wrote a WSJ article this week that stated:

“You should learn whether you’re an investor or a gambler before the market teaches you the difference. Stock gamblers are on the rise. But, sooner or later, they will lose most—if not all—of their recent gains.

Just look at options trading, which has been surging. Many traders use options as a cheap way to try hitting the jackpot: stock-market Powerball.

In late August, a record 62% of premiums paid for options initiating bets on rising stock prices came from people buying no more than 10 contracts. (The long-term average is 34%.) Nearly all such small-fry are inexperienced retail traders, says Jason Goepfert of Sundial Capital Research in Minneapolis, which tracks market sentiment.

In the week ending Sept. 4 alone, says Mr. Goepfert, small traders shelled out $11.5 billion this way—an all-time high and nine times last year’s average. To put that week’s bets in perspective, in all of fiscal 2019 Americans spent $91 billion on lottery tickets.”

This article looks at the speculative behavior of investors in another period of financial history: 1720.

We study the relationship between credit, stock trading and asset prices. There is a wide array of channels through which credit provision can fuel stock prices. On one extreme, cheap credit reduces the cost of capital (discount rate) and boosts prices without trading or wealth transfers. On the other extreme, extrapolators use credit to ride a bubble and lose money. We construct a novel database containing every individual stock transaction for three major British companies during 1720 South Sea Bubble. We link each trader’s stock transactions to daily margin loan positions and subscriptions of new share issues. We find that margin loan holders are more likely to buy (sell) following high (low) returns. Loan holders also sign up to buy new shares of overvalued companies and incur large trading losses as a result of the bubble.’

As a general rule: When credit is cheap, speculators are a dime a dozen. For example, the chart below exhibits the Bank of England’s gross loan issuance in 1720, the year of the South Sea Bubble:

Looking into these loans further, the authors show that 79% of these loan holders were taking speculative positions in the popular stocks of that time: The South Sea Company, Royal African Company, and East India Company.

Knowing that there was rampant levels of speculation in 1720 London, this paper analyzes the behavior of speculators through an exciting new dataset:

‘We construct a novel database containing every individual stock transaction for three major British companies during 1720 South Sea Bubble. We link each trader’s stock transactions to daily margin loan positions and subscriptions of new share issues.’

Their results show that these speculative margin loan holders largely follow the herd by buying at the top, and selling out at the bottom. In addition, these loan holders were twice as likely to ‘buy new shares of overvalued companies’ at peak prices. We see similar scenarios unfold in modern times with retail investors piling into flashy but overpriced IPOs.

The outcome of all this is predictable: poor performance.

‘Even without taking returns on these share subscription positions into account, loan holders incur large trading losses. A margin loan holder realizes a 14 to 23 percentage point lower return than the average investor.

In short, margin holders buy and sell at exactly the wrong time, purchase new offerings at peak prices, and generated returns noticeably lower than the average investor. So who were these margin loan holders?

‘Less experienced individuals, investors who trade a lot and male investors are more likely to take margin loans. In the current finance literature, male investors and frequently trading investors are often associated with poor trading performance.’

The authors’ conclude the article by writing:

‘We collect every single stock transaction with buyer and seller identities for three large British companies during the classical 1720 South Sea Bubble. In May 1720, the Bank of England grants its shareholders the right to borrow cash by collateralizing their shares. Each investor can borrow up to the nominal value of the share and loans are recorded in the stock ledger books of the Bank. The meticulous documentation of the transactions allows us to link, on a daily basis, each investor’s share trading to her loan positions. Our data documents the daily equity transactions of about 50% of the British market capitalization over the course of the bubble and five years before.

We find that the marginal borrower displays speculative trading behavior. First, we document that a loan holder acts as an extrapolator by buying stocks that have experienced high returns in the recent past. Second, we find that borrowers realize lower returns than investors without a loan. Third, we find that margin loan holders are more likely to subscribe to new share offerings at peak prices. This strategy is extremely risky and we can ex-post determine that it leads to negative returns. Finally, we show that there is a positive relation between loan holder buying pressure and stock prices during the bubble.’

200 Years of the United States Stock Market in One Graph

As the Mackintosh quote above suggested, the potential issue facing US markets today is not necessarily the concentration of markets in a few companies, but rather the fact that these few companies are almost all concentrated in the same sector. This begs the question, what has the composition of US markets looked like over the long-term? Well for these types of questions we turn to the financial history data experts at Global Financial Data.

Lo and behold, we have our answer:

What Makes Uninformed Traders Tick?

I recently discussed aspects of this paper in an interview with Michael Green as a part of the Real Vision Festival of Learning, and it seems like a relevant article for today’s topic. One of the main takeaways is that even with greater access to information through technological innovations (in this case the ticker, but could be Robinhood, etc. today), uninformed traders will actually demonstrate increased herding behavior and pile into the same stocks despite having more information on a broader pool of stocks to select from. Feels similar to the recent speculative boom by retail investors that seems to have focused heavily on Tesla and Apple.

This piece on ticker subscriptions and price efficiency is also one of the most fascinating articles I’ve read in months because of its modern implications for passive investing and price discovery. While the parallel is not immediately obvious, the period covered in this paper and recent decades both involve the rise of a new ‘technology’ with the potential to affect pricing efficiency and co-movements in prices.

For example, this quote from Michael Green in a recent article on passive investing states:

Each new dollar invested into passive index funds must purchase the securities in the benchmark index. These purchases exert an inexorable influence on the underlying securities. Per Sharpe’s own work, these are not passive investors – they are mindless systematic active investors with zero interest in the fundamentals of the securities they purchase.

If incremental investor dollars were increasingly flowing into market capitalization indices, we would expect to see two clear phenomena.  First, we would expect to see momentum rewarded as securities that rose in price would capture an increasing fraction of each incremental investment dollar.  Second, we would expect to see a rise in correlation as securities become increasingly traded as a group.

In that same vein, the authors of this article looks at some of these same issues in relation to the ticker:

How does access to information affect price efficiency? We address this question by studying the stock ticker; a device that disseminated price changes to brokerage offices with a ticker subscription. We find that an increased number of ticker subscriptions in a state strengthened the return continuation and return co-movement of firms headquartered in the state. Therefore, the increased dissemination of price changes appears to have decreased price efficiency by increasing uninformed trend chasingOur results challenge the assumption that greater access to information improves price efficiency.


The article specifically looks at ‘return co-movement to determine whether uninformed trading explains return continuation.’

‘The positive β1 coefficients in Panel A of Table 7 indicate that an increased number of ticker subscriptions in a state increases the average local beta of firms in the state, which indicates greater return co-movement among local stocks… This positive coefficient indicates that greater price dissemination in a state is associated with higher return co-movement in the state.’

Their analysis also yielded an interesting insight on ‘local’ investment biases:

‘The positive state-level relation between ticker subscriptions and return co-movement also suggests that the stock ticker did not mitigate local investment bias. Instead, investors appear to have continued to focus their trading on “familiar” local firms despite gaining exposure to non-local firms via the stock ticker. Note that the ticker subscription did not confer any informational advantage that would justify the continuation of local investment bias.’

The authors conclude:

‘In summary, recall that the stock ticker disseminated price changes, not information on fundamentals. Furthermore, any decrease in trading costs associated with ticker subscriptions is predicted to increase informed trading by facilitating arbitrage activity and therefore lowering return co-movement. Overall, the positive relation between ticker subscriptions and return co-movement indicates that greater uninformed trend chasing, not greater liquidity, explains the positive impact of ticker subscriptions on return continuation.


There is an even more direct linkage between the Ticker and Passive Funds: Cost. Tell me this doesn’t sound familiar:

‘Ticker subscriptions had an inverse relation with the cost of transmitting data to the ticker’s location. We find that lower operating costs for a stock ticker increased ticker subscriptions and strengthened both the return continuation as well as the return co-movement of firms in the state. Intuitively, lower data transmission costs reduced price efficiency as the associated increase in investor access to price changes increased trend chasing.’

In other words, lower costs increased the prevalence of tickers, which increased uninformed trading, which decreased price discovery and increased co-movement in returns.

You can see how easy it would be for one to apply this logic to passive funds today. With access to low-cost (or even free) passive ETFs or mutual funds, assets in passive vehicles have exploded. In turn, critics argue that this has produced a ‘momentum’ effect and increased in return co-movements. Food for thought.

‘Overall, the instrumental variable procedure confirms that increasing the access of investors to price changes decreases price efficiency by increasing trend chasing.’

Definitely take the time to read this article.

Value Is Dead, Long Live Value

I’ve shared this before, but it is a particularly relevant article at this point. Using the concept of ‘Growth Regimes’ and Technological Revolutions put forward by Carlota Perez, this paper looks at how Value and Growth perform in various stages of growth regimes.

One of the key considerations I have when re-reading this paper in the mist of COVID-19 is whether we are now entering the “Deployment” phase, the stage in which “the technological revolution diffuses across the whole economy. Entrepreneurial activity moves from building infrastructure to the application layer on top.” In other words, will technology and software advances expand into more traditional “Value” companies as the business constraints resulting from COVID-19 have forced these companies to rely on e-commerce and technology. For example, Target’s digital sales in the first quarter had increased 141% from the first quarter of 2019. Only time will tell how common these developments will be, but it’s something to consider.

“In her work ‘Technological Revolutions and Financial Capital’, Carlota Perez identifies the phases of a revolution as two halves: the Installation phase and Deployment phase. 

In the Installation phase of a new Technological Revolution, the previous revolution is nearing exhaustion of profitable opportunities. Then, through experimentation new social and economic norms are established for the utilization of ideas. As these concepts take shape and the form factor for utilization is established, people see the potential growth and infrastructure is laid for their widespread adoption. This Installation phase is one of creative destruction, as the new standards replace those from preceding revolutions. It is a period where wealth becomes skewed as innovators are rewarded. 

As the new technology shifts to becoming the new norm, the Deployment phase begins. It takes advantage of the infrastructure laid in the Installation phase and expands to broad societal acceptance. This begins with a high growth phase, where real growth occurs, and the technological revolution diffuses across the whole economy. Entrepreneurial activity moves from building infrastructure to the application layer on top. This is a time of creative construction. Winners emerge to form oligopolies, and this growth eventually slows to the Maturity phase, where market growth stagnates.”

The main takeaway from this article is that Value underperforms in the Installation Phase, but outperforms after the Turning Point, as the cycle enters the Deployment Phase.

The Origins of High-Tech Venture Investing in America

As we all know, the Tech sector is equally beloved by VC firms in the private markets as investors in the public markets. This paper takes a deeper look at the origins of tech investing in the United States, venture capital pre-Silicon Valley, and more:

“The United States has developed an unparalleled environment for the provision of high-tech investment finance. Today it is reflected in the strength of agglomeration economies in Silicon Valley, but historically its origins lay in the East Coast. Notably, immediate post-WWII efforts to establish the American Research and Development Corporation created a precedent for “long-tail” high-tech investing. This approach became institutionalized in the United States over subsequent decades in a way that has been difficult to replicate in other countries. The role of history helps to explain why.”