David Ricardo: the world’s greatest investors

David Ricardo © Alamy
David Ricardo spread false rumours after the Battle of Waterloo

Ricardo was a political economist and, along with the likes of Adam Smith, one of the first major economic thinkers. He was a staunch opponent of the Corn Laws, which imposed restrictions and tariffs on imported grain and hence kept prices high. His theory of comparative advantage is still taught to economics students as one of the key reasons why free trade is good for society. Ricardo was also a successful investor.

Born in London in 1772, he left school at 14 to take a job at his father’s stockbroking firm. For the next 30 years he traded stocks and bonds on the London Stock Exchange, successfully retiring shortly after the Battle of Waterloo in 1815.

What was his strategy?

Ricardo seems to have been a contrarian, identifying when fear or greed had pushed prices excessively high or low, and then going in the opposite direction. He combined this approach with strict risk management, and is credited with coming up with the idea of closing losing positions quickly, but letting winning positions run. He also made money from arranging syndicates that underwrote government debt.

Did this work?

Although by the age of 21 he had become estranged from his wealthy family, his financial speculation gave him the income to keep himself in luxury. By the time he retired he had bought a seat in parliament (in the era when seats were bought and sold) and Gatcombe Park estate. When he died in 1823 his estate was valued at £600,000 (£48.5m in today’s money).

What was his best investment?

Ricardo’s status was made during the Battle of Waterloo. Legend has it that he learned of the outcome before the official reports, but publicly sold some of his holdings of government bonds in order to push prices down, causing the gilts market to plummet. Ricardo then swooped in, adding to his position and ending up with estimated profits of £1m (£68m). In letters to his friends he claimed that the extent of his profits was exaggerated, but admitted that he had still made a huge amount of money during the fortnight.

What lessons can Ricardo teach us?

Ricardo’s behaviour was unethical, if not illegal back then. However, it demonstrates the importance of ignoring rumours and inside information, and also shows that money can be made from keeping your nerve and going against the crowd. Ricardo’s advice about closing losing positions, but keeping those that are doing well open, is also useful.