A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

THE SOUTH SEA BUBBLE
Suppose your broker has called you and recommended that
you invest in a new company with no sales or earnings—just
great prospects. “What business?” you say. “I’m sorry,”
your broker explains, “no one must know what the business
is, but I can promise you enormous riches.” A con game, you
say. Right you are, but 300 years ago in England this was one
of the hottest new issues of the period. And, just as you
guessed, investors got very badly burned. The story
illustrates how fraud can make greedy people even more eager
to part with their money.
At the time of the South Sea Bubble, the British were ripe
for throwing away money. A long period of prosperity had
resulted in fat savings and thin investment outlets. In those
days, owning stock was considered something of a privilege.
As late as 1693, for example, only 499 souls benefited from

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ownership of East India stock. They reaped rewards in
several ways, not least of which was that their dividends
were untaxed. Also, their number included women, for stock
represented one of the few forms of property that British
women could possess in their own right. The South Sea
Company, which obligingly filled the need for investment
vehicles, had been formed in 1711 to restore faith in the
government’s ability to meet its obligations. The company
took on a government IOU of almost £10 million. As a
reward, it was given a monopoly over all trade to the South
Seas. The public believed immense riches were to be made in
such trade and regarded the stock with distinct favor.
From the very beginning, the South Sea Company reaped
profits at the expense of others. Holders of the government
securities to be assumed by the company simply exchanged
their securities for those of the South Sea Company. Those
with prior knowledge of the plan quietly bought up
government securities selling as low as £55 and then turned
them in at par for £100 worth of South Sea stock when the
company was incorporated. Not a single director of the
company had the slightest experience in South American
trade. This did not stop them from quickly outfitting African

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slave ships (the sale of slaves being one of the most lucrative
features of South American trade). But even this venture did
not prove profitable, because the mortality rate on the ships
was so high.
The directors were, however, wise in the art of public
appearance. An impressive house in London was rented, and
the boardroom was furnished with thirty black Spanish
upholstered chairs whose beechwood frames and gilt nails
made them handsome to look at but uncomfortable to sit in.
In the meantime, a shipload of company wool that was
desperately needed in Vera Cruz was sent instead to
Cartagena, where it rotted on the wharf for lack of buyers.
Still, the stock of the company held its own and even rose
modestly over the next few years despite the dilutive effect
of “bonus” stock dividends and a war with Spain that led to a
temporary collapse in trading opportunities. John Carswell,
the author of an excellent history, 
The South Sea Bubble
,
wrote of John Blunt, a director and one of the prime
promoters of the securities of the South Sea Company, that
“he continued to live his life with a prayer-book in his right
hand and a prospectus in his left, never letting his right hand
know what his left hand was doing.”

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Across the Channel, another stock company was formed
by an exiled Englishman named John Law. Law’s great goal in
life was to replace metal as money and create more liquidity
through a national paper currency backed by the state and
controlled through a network of local agencies. To further his
purpose, Law acquired a derelict concern called the
Mississippi Company and proceeded to build a conglomerate
that became one of the largest capital enterprises ever to exist.
The Mississippi Company attracted speculators and their
money from throughout the Continent. The word
“millionaire” was invented at this time, and no wonder: The
price of Mississippi stock rose from 100 to 2,000 in just two
years, even though there was no logical reason for such an
increase. At one time the inflated total market value of the
stock of the Mississippi Company in France was more than
eighty times that of all the gold and silver in the country.
Meanwhile, back on the English side of the Channel, a bit
of jingoism now began to appear in some of the great English
houses. Why should all the money be going to the French
Mississippi Company? What did England have to counter
this? The answer was the South Sea Company, whose
prospects were beginning to look a bit better, especially with

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the news that there would be peace with Spain and hence the
way to the South American trade would at last be clear.
Mexicans supposedly were waiting for the opportunity to
empty their gold mines in return for England’s abundant
supply of cotton and woolen goods. This was free enterprise
at its finest.
In 1720, the directors, an avaricious lot, decided to
capitalize on their reputation by offering to fund the entire
national debt, amounting to £31 million. This was boldness
indeed, and the public loved it. When a bill to that effect was
introduced in Parliament, the stock promptly rose from £130
to £300.
Various friends and backers who had shown interest in
getting the bill passed were rewarded with free stock grants
that could be “sold” back to the company when the price
went up, with the individual collecting the profit. Among
those rewarded were George I’s mistress and her “nieces,” all
of whom bore a startling resemblance to the king.
On April 12, 1720, five days after the bill became law, the
South Sea Company sold a new issue of stock at £300. The
issue could be bought on the installment plan—£60 down and
the rest in eight easy payments. Even the king could not

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resist; he subscribed for stock totaling £100,000. Fights broke
out among other investors surging to buy. To ease the public
appetite, the South Sea directors announced another new
issue—this one at £400. But the public was ravenous. Within
a month the stock was £550. On June 15 yet another issue
was floated. This time the payment plan was even easier—10
percent down and not another payment for a year. The stock
hit £800. Half the House of Lords and more than half the
House of Commons signed on. Eventually, the price rose to
£1,000. The speculative craze was in full bloom.
Not even the South Sea Company was capable of handling
the demands of all the fools who wanted to be parted from
their money. Investors looked for other new ventures where
they could get in on the ground floor. Just as speculators
today search for the next Google, so in England in the early
1700s they looked for the next South Sea Company.
Promoters obliged by organizing and bringing to the market a
flood of new issues to meet the insatiable craving for
investment.
As the days passed, new financing proposals ranged from
ingenious to absurd—from importing a large number of
jackasses from Spain (even though there was an abundant

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supply in England) to making salt water fresh. Increasingly
the promotions involved some element of fraud, such as
making boards out of sawdust. There were nearly one
hundred different projects, each more extravagant and
deceptive than the other, but each offering the hope of
immense gain. They soon received the name of “bubbles,” as
appropriate a name as could be devised. Like bubbles, they
popped quickly—usually within a week or so.
The public, it seemed, would buy anything. New
companies seeking financing during this period were
organized for such purposes as the building of ships against
pirates; encouraging the breeding of horses in England; trading
in human hair; building hospitals for bastard children;
extracting silver from lead; extracting sunlight from
cucumbers; and even producing a wheel of perpetual motion.
The prize, however, must surely go to the unknown soul
who started “A Company for carrying on an undertaking of
great advantage, but nobody to know what it is.” The
prospectus promised unheard-of rewards. At nine o’clock in
the morning, when the subscription books opened, crowds of
people from all walks of life practically beat down the door in
an effort to subscribe. Within five hours 1,000 investors

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handed over their money for shares in the company. Not
being greedy himself, the promoter promptly closed up shop
and set off for the Continent. He was never heard from again.
Not all investors in the bubble companies believed in the
feasibility of the schemes to which they subscribed. People
were “too sensible” for that. They did believe, however, in
the “greater fool” theory—that prices would rise, that buyers
would be found, and that they would make money. Thus,
most investors considered their actions the height of
rationality, expecting that they could sell their shares at a
premium in the “after market,” that is, the trading market in
the shares after their initial issue.
Whom the gods would destroy, they first ridicule. Signs
that the end was near appeared with the issuance of a pack of
South Sea playing cards. Each card contained a caricature of a
bubble company, with an appropriate verse inscribed
underneath. One of these, the Puckle Machine Company, was
supposed to produce machines discharging both round and
square cannonballs and bullets. Puckle claimed that his
machine would revolutionize the art of war. The eight of
spades, shown on the following page, described it as follows: