Advertisement

What Gulliver’s Travels teaches you about financial bubbles

Matthew Partridge looks at what Jonathan Swift's classic Gulliver's Travels can teach investors about not losing their heads.

910-Black-634
Gulliver gets tied up in knots

Gulliver's Travels is a novel by Jonathan Swift, written in 1726-7. It is an adventure story about a shipwrecked sailor's various encounters with strangers, including a race of miniature people; he also makes the acquaintance of some intelligent horses. At the end of his travels he returns home completely disillusioned about humanity, and chooses to live the rest of his life as a recluse. The book is seen as a satire of the various political and financial scandals dogging Britain at the time.

The key moment

Gulliver's problems begin when he decides to "accept an advantageous offer" from a captain "making a voyage to the South Sea", which ends up in disaster. Later on in the book the hero ends up in Balnibarbi, a country that "lies miserably [in] waste, the houses in ruins, and the people without food or clothes". The ruler explains that these problems are due to the population's enthusiasm for wasting money on schemes organised by the "Academy of Projectors" located on "a continuation of several houses on both sides of a street" (in Swift's time London's financial centre was located in the streets next to the Royal Exchange).

Lessons for investors

These episodes are references to the 1720 South Sea Bubble. During the first half of the year, there were rumours that the Spanish would allow the South Sea Company to massively expand their trade with South America.

Advertisement - Article continues below

This chatter, combined with a complicated scheme to encourage people to convert British government debt into South Sea stock, caused the price of South Sea shares to surge from £150 to around £1,000 before collapsing. Swift, like many investors, lost large sums because he bought at the top of the market.

Other financial wisdom

The South Sea episode reminds us that financial bubbles aren't just a modern problem, but seem to be an inevitable byproduct of financial markets. The best way to avoid being sucked into them is to look dispassionately at a company whose shares you are thinking of buying, considering various scenarios rather than just the most optimistic ones. However, this is easier said than done, especially when less cautious people all around you are making fortunes. That's why bubbles occur so frequently.

Advertisement
Advertisement

Recommended

Great frauds in history: Alexander Fordyce and shorting the East India Company
People

Great frauds in history: Alexander Fordyce and shorting the East India Company

Alexander Fordyce's disastrous shorting of the East India Company led to him bankrupting the private bank in which he was a partner.
12 Aug 2020
Too embarrassed to ask: what is a dividend yield?
Too embarrassed to ask

Too embarrassed to ask: what is a dividend yield?

Learn what a dividend yield is and what it can tell investors about a company in MoneyWeek's latest "too embarrassed to ask” video.
11 Aug 2020
James Montier: valuations are way too high
Investment gurus

James Montier: valuations are way too high

The market is completely discounting the risk to the economy and operating as if there is nothing to worry about, pricing in a V-shaped recovery, says…
10 Aug 2020
Don’t dump your dividends
Income investing

Don’t dump your dividends

This crisis certainly does not prove that taking regular capital gains is safer than relying on natural income from dividends.
10 Aug 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Gold and silver have taken a vicious beating – is the bull market over already?
Gold

Gold and silver have taken a vicious beating – is the bull market over already?

The gold price has tumbled recently, leaving traders nursing losses – just a nasty correction or has the gold bull market run out of steam? Dominic Fr…
12 Aug 2020
Should you take advantage of the UK’s new breed of domestic holidaymakers?
Buy to let

Should you take advantage of the UK’s new breed of domestic holidaymakers?

With Britons choosing to holiday in the UK this year, the owners of the country’s holiday cottages are cleaning up. Should you buy in, too? Merryn? So…
10 Aug 2020