What sunken treasure can teach you about investing in Vietnam
The king's position on profits was instrumental in the treasure-hunting bubble of the 1690s. Merryn Somerset Webb explains how that applies to investing in Vietnam.
If you are holidaying in Cornwall this year, spare a little time to visit the south coast village of Charlestown.
Fans of the TV show Poldark will want to head straight to the village's immaculate Georgian harbour (it was used as the location for Truro harbour) or to the pebbled beach. But that done, you should turn back, perhaps via the excellent ice cream shop, towards another attraction: the Charlestown Shipwreck and Heritage Museum.
There you will find artefacts of maritime history from 150 shipwrecks dating back to the early 1700s and the thing I most want you to see one of the largest collections of underwater diving equipment collections in the UK. This stuff is interesting in itself, but I'm more obsessed with it than most.
I am making my way through a three volume set of The Constitution and Finance of English Scottish and Irish Joint-Stock Companies to 1720, written by William Robert Scott in 1912 (sent to me as holiday reading by a kind friend) and I am finding very pertinent lessons for today's stockmarkets in the treasure hunting and diving bell bubble of the 1690s.
This was kicked off by the stunning treasure recovery efforts of one William Phipps. Phipps knew where a "richly laden Spanish plate ship" had been wrecked and, after one failed attempt to find it, persuaded the Duke of Albermarle to put up the majority of the cash for another go in 1687. They formed a small joint stock company and Phipps headed for Hispaniola.
There, just as he was giving up and calling in the last boat ("provisions were running low"), a diver popped down to grab a piece of seaweed one of the men was interested in (or so the story goes). The diver saw the shape of a gun on the seabed, "operations were then pursued vigorously" and Phipps's ship sailed home with 32 tons of silver and jewels worth roughly £250,000 (well over £50m in today's money).
There was then a little to-ing and fro-ing with the King. The expedition had been granted by a patent as almost everything had to be at the time and this gave him an entitlement to 10% of the proceeds. Some thought he should have substantially more, given the size of the haul. But in the end he graciously settled for his 10%, and as a result, the original investing adventurers made a return of 10,000% double the return Francis Drake made the investors in his legendary circumnavigation of the world 100 years earlier.
That, as modern investors can imagine all too well, did it. Phipp's success had odds stacked against it "Twas a mere lottery of hundred thousand to one... that folks should go three thousand miles to angle in the open sea for pieces of eight!" wrote Daniel Defoe at the time. But its success, and the confirmation of the system whereby the King would offer warrants and take only his 10%, triggered the rise of scores of companies named firmly after their intentions two classic examples being The Company for Recovering Treasure from Wrecks off Bermuda and The Company Created for Recovering Treasure from Wrecks in Other Places Granted to Thomas Neale.
The treasure hunting boom of 1692-95 had begun. Scott quoted a contemporary writer as saying: "Men of good understanding...were allured by the hopes of getting vast wealth without trouble" and shares in all related companies soared. This wasn't as nuts as it now sounds. The 1690s was a period of enormous technological innovation and a second lot of companies rose in parallel to the treasure hunters businesses such as The Company Owning the Diving Engine Invented by Joseph Williams and The Company Owning the Diving Engine Invented by John Tyzack.
Patents for diving equipment were being churned out, and one inventor (Francis Smartfoot) even came up with a plan for a "sea crab" which would use a series of levers and grappling irons to drag bullion off the seabed.
It was exciting stuff and investing in it was no different to us investing in technology companies with no assets beyond hope and good coders. But, of course, it came to nothing. The patent holders went on a few exciting voyages, and the inventors had some fun. But the shareholders, mostly, lost everything.
So, on to the lessons. The first few are simple and obvious.
Companies that make things are likely to have more longevity than those that simply search for a limited number of things others have dropped. New technology is no good if you don't know what to do with it (what use is a brilliant diving bell if you can't find the wreck?). Bubbles happen everywhere, and all bubbles make sense in their time.
And, finally, the success of a market can depend almost entirely on establishing exactly what the role of the state is: if Phipps had lost 90% of his bullion to the monarch, would the boom have kicked off as it did?
This brings me to the modern market I am most interested in this week. Not Greece, not China (where I told you not to put in too much and not to buy if you weren't in for ten years) and not the US, but Vietnam, where poor liquidity and state restrictions have long held the market back. According to Dragon Capital, on a price/earnings ratio of only 13 times, it is the cheapest in the region bar Pakistan.
Good news, then, that the government has recently made its role in the market both clearer and smaller. Private firms are now able to operate in almost every area of the economy. State shares in the country's overbearing state-owned entities are to be sold off, and restrictions on foreigners holding Vietnamese equities are to be lifted, something analysts suggest will be a "game-changer" that will finally give the country a "properly functioning stockmarket".
Add that to Vietnam's already competitive labour force, its recent history of fast GDP growth, and its perfectly good roster of listed companies, and you might expect some good returns from the market over the next few years.
The VinaCapital Vietnam Opportunity Fund is one possible way in. It is currently trading on a 20% discount to its net asset value, despite the interesting shift of the state in Vietnam. As such it will, I am certain, be a better long term investment than The Company Created for Recovering Treasure from Wrecks in Other Places Granted to Thomas Neale.
• This article was first published in the Financial Times