I have just hung a vast print of a painting by Trevor Jones on my office wall. One reason for this is that it is an excellent portrait of Dorian Satoshi Nakamoto, who may or may not have been the original developer of cryptocurrency bitcoin (the developer used this name, but this person is not necessarily the developer).
Another is that Jones uses old copies of the Financial Times as the background for some of his paintings and my byline photo features just behind Nakamoto's left ear. I am vain enough to like this. But the best reason for having it up is that it works as a constant reminder that bubbles of one sort or another are never far away.
The bitcoin bubble has been one of the most perfect bubbles I have ever watched. An exciting new technology arrived; a few people in the know bought in; prices started to rise. Huge claims began to be made about how the world was on the verge of being disrupted by said technology, and a mania began. Prices went berserk up 70% in one week alone in December 2017 then went parabolic, and finally collapsed.
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Having hit nearly $20,000 in December 2017, bitcoin looks like it will enter 2019 at more like $3,000. Fine if you originally bought at $0.01; not if you bought at $18,000. I can't yet recommend a good book on all this it's too early but it's worth using the spectacle as an excuse to revisit a few past bubbles.
Extraordinary Popular Delusions and the Madness of Crowds
Good news, then, that Charles Mackay's classic history of manias, Extraordinary Popular Delusions and the Madness of Crowds, has just been reissued. The 1841 book has its fair share of fiction in it: Mackay might have embellished his actual knowledge of the tulip mania, witchcraft and alchemy.
But as stockmarket historian Russell Napier points out in his new introduction, the key point stands, and can never be repeated enough: we think we live in a rational world led by science and understanding. We do not. Instead, we often think in crowds and "when we think in crowds we sometimes don't think at all, or at least think very differently", Napier says.
Or as Mackay put it: "If two or three persons can only be found to take the leap in any absurdity however great there is sure to be plenty of imitators. Like sheep in a field if one clears the stile, the rest will follow." This is how bitcoin got close to $20,000.
You might have Popular Delusions already. But it is still worth looking at the new edition if only for the warning it contains from Napier. The growth of ever-larger governments and corporations, which "formalise crowd behaviour to an extent Mackay could not have imagined", he says, along with our willingness to create new crowds on social media, means that we are "more engulfed by crowd thinking than ever before". That sets the conditions for a future full of madness.
I also suggest returning to the dotcom bubble, now almost forgotten in excitement of the crumbling tech boom of the last decade, but even more perfect in its build-up and bust than the bitcoin bubble. I'd go for John Cassidy's 2002 book Dot.con: The Greatest Story Ever Sold for its sense of immediacy and great storytelling.
A favourite titbit: in 1999, the University of Michigan started a course, "From startup to IPO in 14 weeks" in which students developed their own dotcom proposals and, here's the nuts bit, "a venture capital firm paid $12,000 to sit in on the class". Yup, VCs were so desperate to chuck money into anything to do with the internet that they would pay to listen to students chat.
Another concerns Kozmo.com, a New York based online store that promised free delivery for orders as small as one packet of gum. Each order cost $10 in labour alone; the average order value was $12. You see the problem but it was harder to see at the time. Cassidy includes contemporary quotes from tech guru George Gilder: "I don't think internet valuations are crazy. I think they reflect a fundamental embrace of huge opportunities."
All this fun aside, another reason to re-read Cassidy is his epilogue, which offers a neat reminder that most technology-related bubbles have something fantastic behind them and that fantastic thing must be watched very closely afterwards. Cassidy missed this in the early 2000s, as did everyone. "The internet, it transpired, was not a disruptive technology that would destroy any company locked into the old ways of doing things, such as selling books in stores, printing news on newspaper or using people to sell stocks." Hmmm. Turns out it was it just took a few more years. So watch bitcoin it might yet transform global payment systems.
On to capitalism itself. One of the wonderful feelings of the dotcom bubble was that anyone could start a business and anyone could succeed. One 1999 survey suggested that one in 12 Americans was trying to start a business and there was much talk about "the demise of the corporation and the rise of small businesses", something that really is the competitive capitalist's dream and one that died with the bubble.
In 2014, companies that were less than two years old made up only 8% of US companies, down from 12% in the 1980s. To find out why, you must read Denise Hearn and Jonathan Tepper's The Myth of Capitalism. He argues convincingly that all our problems stem from our abandonment of the idea that capitalism requires constant and intense competition.
The monopoly, oligopoly and concentration allowed by rising regulation and failed antitrust law 80% of the US beer market is controlled by just two companies, for instance have given giant firms too much control over suppliers, government and labour (hence static wages). Inequality and populism are the natural consequences.
In a slightly lighter vein, but returning to the subject of disruption and technologies that lose their place in history, is Farewell to the Horse, by Ulrich Raulff. I may have come late to this book, but it's a brilliant exploration of the role of the horse in our culture and our economy, and its decline from vital source of transport, mobile power station and weapon of war to cutesy plaything for teenage girls.
More on animals forming economies arrives in the just-published Silver Shoals: Five Fish That Made Britain, by Charles Rangeley-Wilson. This is a great read for all your fishing mad and conservationist friends as well as for anyone still wondering why fish are such a big part of the Brexit fuss. After all, as Rangeley-Wilson points out, if you measure the Common Fisheries Policy's success by how well it has preserved fish stocks, it has been a "disaster".
Investment Trusts HandbookBy Jonathan DaviesBuy on Amazon
Finally, I feel I must offer you an actual investing book. For more detailed practical investing advice, Jonathan Davis has just produced his latest edition of the Investment Trusts Handbook. It sounds dull it is anything but. And if one feature of our coming bear market is that we will encounter opportunities to pick up good trusts at wide discounts to their net asset value, you might as well get ahead of the knowledge game now.
This article was first published in the Financial Times
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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