MARYFIELD, DUNDEE – A few months ago in The Ultimate Philanthrope a reader suggested that Satoshi Nakamoto, the mystery man behind the creation of bitcoin, might be a modern-day Thomas Guy.
Guy, a bookseller in the 1700s, made a fortune as a speculator during the Great South Sea bubble and then gave it away to fund a hospital which now stands just around the corner from our London office.
Could Satoshi Nakamoto have similar intentions with his vast hoard of BTC? Possibly – though whoever they are, they haven’t started moving their coins around yet…
But in today’s note, it’s worth exploring exactly who Thomas Guy was – and how he managed to make such a fortune from a bubble which ruined vast swathes of British society (even Isaac Newton was left holding the bag once the smoke had cleared). The trick to Guy’s success remains just as relevant today…
Paper gains are only potential profits
By Nickolai Hubble, for Fortune & Freedom
Every day of our pre-lockdown world I would exit London Bridge station and walk past Guy’s Hospital in Southwark on my way to the Southbank Investment Research offices. Little did I know about the stockmarket secret which paid for the place three hundred years ago. The same secret you need to discover now, before it’s too late…
Thomas Guy made his fortune(s) in two completely different ways. He was the publisher of cheap, compact and unlicensed Bibles which undercut the competition. But that’s not how I suggest you manage your finances today.
Guy’s second fortune came from speculation. Had the good fortune of being cashed up during Britain’s first real Big Bang in 1720.
Government debt of a surprising variety and style had become tradeable. And then stockmarkets boomed too.
I remember being mystified by the idea that a bond’s price can change. After all, it’s a promise to pay money. So how can its price change? Isn’t it just worth the total amount of money it promises?
Part of the answer is that people just seem to love buying and selling. Supply and demand sets prices, in the end. So, if a bond is tradeable, its price will fluctuate.
But the more sophisticated answer involves things like the risk of default – a probability, not an absolute – and inflation. Money tomorrow is not worth the same as money today.
The key consequence of being able to buy and sell government debt was, however, what it did to demand for that government debt. Because people could buy and sell what the government owed them, more people were willing to lend the government money.
They knew that, should they need the cash, they could get it for a reasonable price for their bonds in Exchange Alley. Thus, the UK was able to finance its wars better than many others by distributing the debt burden more easily.
Guy invested in some of these government obligations early on, including “sailors’ tickets” which were issued in lieu of payment to the Royal Navy’s sailors when the government didn’t have the cash.
The next step was to apply all this to stocks. And so companies were formed and secondary markets in their shares sprung up alongside the markets in government debt.
Shares are more volatile than government bonds because their future is less certain. And so speculation in price gains became popular.
Around the time Guy was busy in bond markets, the infamous South Sea Company was repurposed to try and simplify and reduce the interest on some of the government’s debt. The underlying idea was what’s now known as a debt for equity swap.
People who owned certain government bonds could swap them for shares in the South Sea Company – an entity which did three things. It held onto that debt and collected the interest on it, thereby making the administration of the debt much cheaper by collecting it in once place. It reduced the interest which the government had to pay on the debt as part of the overall deal. And the South Sea Company received a few different monopolies on trade with parts of South America. These would underpin the hopes and dreams of investors for future profits.
Thomas Guy converted his bonds to around £54,000 of South Sea shares at around £100 per share. The share price in Exchange Alley subsequently rose to £300 as the dodgy South Sea scheme took off in a speculative frenzy. At that point, Guy began to sell out, but only slowly, in parcels, all the way up to £700 – about £350 short of the final peak.
In today’s money, Guy made about £400 million pounds…
One historian called it “the largest honest fortune made out of the Bubble,” a reference to some of the inside dealings which were less than savoury even by the standard of the times.
Guy turned to his passion for helping the sick. Conveniently, he was able to secure a 999 year lease of the Guy’s Hospital site in Southwark for… a peppercorn.
But he did spend the bulk of his fortunes on setting up the hospital there for those “who may be adjudged or called incurable.” He visited the hospital building site, complained about feeling cold and died within a day.
Guy’s remains one of the world’s leading medical institutions for research today. It’s ironic that one of Britain’s premier medical establishments was financed by successful speculation which eventually led to a bust and national tragedy.
But, as one reader recently wrote to me, he subscribed to get useful financial information, not a history lesson. So, why is all this relevant? What is the stockmarket secret of Guy’s hospital?
Thomas Levenson’s book Money For Nothing, which is about the South Sea Bubble, explains how Guy escaped with his money before the South Sea Bubble burst.
[…] the fact that Guy became able to give on such a scale shows what was possible for a cautious and canny—but otherwise ordinary—investor during the South Sea spring. Remember: Guy was no mathematical savant. He didn’t bandy equations at Royal Society meetings. He had no insider knowledge of Blunt’s schemes or the ministry’s plans. Rather, his gift was a readiness to think clearly about what he owned and why. He had held his shares for years. When the Company’s circumstances clearly and fundamentally changed, so did his approach, as he recognized that a boring, ordinary business had become something different more or less overnight. Guy kept no diary and wrote few letters, so his reasoning can only be inferred from his actions, but he seems to have reached the conclusion that his shares were worth more as cash than as part ownership of a novel and increasingly uncertain financial experiment.
Having come to that judgment, he made a clear and binary decision. He accepted that he might not be selling at the peak the market might achieve—but recognized that he was still gaining a completely satisfactory return on a long-term investment. Throughout the process of liquidating his holdings, he continued to act sensibly, staging his trades to avoid troubling the market and, along the way, enjoying some of the ongoing rise. Finally, and perhaps most important, he didn’t second-guess himself. Once he sold his last shares, he was done. Though the Alley still bubbled and South Sea prices continued to rise after his exit, he did not chase the stock once he’d turned what had been a purely paper profit into sweet, solid, hard cash.
In other words, you can behave rationally during a bubble. You can get your hands on the gains they offer, and walk away with them.
The key question is when to sell. That is what investors call an exit strategy. And they like to define it before they make their investment.
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Wishing you a good weekend,
Boaz Shoshan
Editor, Capital & Conflict
Category: Investing in Bitcoin