Kieran Heinemann: the history of shareholder capitalism

Merryn talks to Kieran Heinemann, author of Playing the Market: Retail Investment and Speculation in Twentieth-Century Britain, about the history of the UK retail investor – a longer history than perhaps you might imagine


Merryn Somerset Webb: Hello and welcome to my MoneyWeek magazine podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine. And today, I have something a little different for you. We have had some wonderful investment gurus and fund managers on recently, but today we’re going to look at things slightly from the other side. Who buys their products? It’s us. It’s the retail investor. Where do the retail investor come from? And where are we going?

So, today, we’re going to talk to Kieran Heinemann, author of Playing the Market, Retail Investment and Speculation in Twentieth-Century Britain. Kieran, hello. Thank you for joining us.

Kieran Heinemann: Hi, Merryn. And thanks for having me.

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Merryn: Now, the first thing I’m going to say is that I think that all MoneyWeek readers should go out and buy your book because it is absolutely fascinating. But only successful investors who have been listening carefully to our advice over the last 20 years or so will be able to afford it because it’s £75, but pretty much worth every penny. So, MoneyWeek readers, take £75 from your Scottish Mortgage profits and nip out and buy the book.

Right, Kieran, so let’s talk about the UK retail investor. For those that are not accustomed to city speak, retail investor just means ordinary investor, individual investor, like you or me. So, let’s start with this. This is an area of history you’ve been interested in for a long time?

Kieran: Yes, I would say so. I studied history in Berlin, and then later Cambridge, but started doing an Erasmus in London. And that’s the time when I really become interested in British history, into Thatcherism, and then I looked at the big privatisations and this idea of bringing about popular capitalism. But I realised there’s actually a much deeper story to it and that Britain has this much longer history of retail investment.

Merryn: OK. Let’s talk about that because, actually, you’re right. If you talked to the average person about when British people started investing in the stockmarket, they’ll think straight back to the 1980s, and they’d say, that was Margaret Thatcher and her drive for shareholder democracy. She privatised all these big companies. People got little portfolios of stocks, and we’ve never looked back. But of course, that is starting the story far, far too late. Where does it really start?

Kieran: Yes, I would probably say this idea of retail investment probably starts in the 19th century, to some extent at least. So, what you do see as a result of industrialisation and some speculative outbursts in the 1840s, in railway shares, and then later in the 1870s, in the 1880s, in new companies, is something like what resembles the modern investing public.

And that’s helped also, of course, by the expansion of telegraph networks. So, that brings about regional exchanges across Britain and also more and more circulation of financial information about public companies and stockmarket prices in the financial press. And that’s really when this started, to some extent.

Merryn: Tell me about these regional exchanges. Because today, we’re very used to this idea that the stock exchange is in the biggest city in the country. So, our stock exchange is very London based. Occasionally, you hear people talking about how great it would be to have more regional exchanges. For example, there was a move a couple of years back to open a new stock exchange in Scotland, which kind of dribbled out, didn’t really go anywhere.

But I was thinking it’s rather a wonderful idea to have the sense that you can spread the success of a listed company around the country. And so, to hear that this is exactly what we had 100-odd years ago is fascinating. Tell us a bit about that.

Kieran: Yes. So, indeed, you used to have exchanges in, let’s say, Manchester, Birmingham, Edinburgh, Dublin and so on.

And they would trade primarily in the regional companies but would also pass on a lot of business to the mothership in London, to the London Stock Exchange, which was still by far the largest domestic and of course international market. And you would have regional stockbrokers, who would be members of those exchanges.

But it’s also important to know, actually, that a lot of the retail activity, up until the middle of the 20th century, doesn’t actually happen on these official and organised exchanges. A lot of it actually happens on the market fringes. So, we would have outside brokers in cities, larger cities, but most importantly in London, who would actively go out and seek the business of these retail investors which the London Stock Exchange actually would not cater for.

And that’s one of the interesting things about this emergence of an investing public, that it’s actually happening, to some extent, not because of the city, but in spite of the city.

So, what I mean by that is the fact that the city, and in particular the London Stock Exchange, are quite against this idea of bringing in ordinary people to invest in stocks and shares, and even worse, to start speculating, because they believe that they have… It’s a loss-loss situation for them. If they start making money that way, that would sort of upend the social order, and the members of the official exchanges are very class conscious, very conservative, very paternalistic. And on the other hand, if they start speculating and burning their fingers, of course, that would also bring the reputation of this honourable house into disrepute.

So, they’re very much against this idea that there should be universal share ownership, unlike in the US, of course, where the New York Stock Exchange actively goes out, tries to make shares as available as possible.

Merryn: And the New York Stock Exchange did that why? Just to grow the stock exchange, to grow the number of companies listed, to grow the business, effectively?

Kieran: On the one hand, of course, to grow a business. But it’s also doing it for ideological reasons, because it believes, that way, the political system and its voters will be on the same side and really to put capitalism on a broader footing. So, there’s a business side of it, but there’s also an ideological reason to it.

Merryn: So, the idea that if everyone holds some shares, everyone feels they have a stake in capitalism, and so you have a general public that is much more supportive of capitalism because they’re connected to it. That’s the idea.

Kieran: Precisely. Yes. I would say the reason why you see this expansion in Britain happening to some extent, nevertheless not as much as in the US, but far more, for instance, in the continent, for one reason is that you have these proponents of wider share ownership, of popular capitalism, as it’s already called from the 1920s, or people who want to bring about a democratisation of investment, again a 1920s term, that’s very commonly used and thrown around again these days.

They are in the financial press. And they of course also have commercial reasons. So, of course, the more people buy and invest in shares, the more copies of the Financial News or the Financial Times…

Merryn: Let me just ask you about this business of… You used the phrase democratisation of capitalism, and you say that that’s a phrase that came into usage in the 1920s, which interestingly I still use that phrase. Who drove that idea then, that capitalism should somehow be in itself democratic? Next to a democratic political system, you should have a democratic capitalism. Where did that come from?

Kieran: It comes largely from the financial press, and it comes also from certain conservative thinkers and liberal thinkers, primarily, really, the Liberal Party of that time. Because they believe that if employees, company employees, workers could own shares of the companies that they work for, then the divide between capital and labour can be bridged and more people could also share in the successes of the capitalist system.

Merryn: It’s brilliant, but it didn’t quite work in the 1920s, did it? In that even though a large percentage of the shares on the UK stockmarkets were held by individuals, it was a very small number of individuals. I can’t remember the exact number, but maybe, at that point, maybe around 6% of the population were actually equity owners in any way.

Kieran: Yes. That’s right. It was still very much the preserve of a small and wealthy elite, and they owned around, around the 20s, I would say that it’s probably around 60% of the shares.

That definitely begins to change from the 1950s onwards, when pension funds, insurance companies increasingly start moving their holdings out of fixed income securities into equities. That period is really called the cult of the equity. So, when pension fund managers especially, on a large scale, start moving it into equities.

Merryn: Sorry to interrupt, Kieran. Previous to this, most pension funds had been held almost entirely in government bonds of one kind or another, and that was considered to be the prudent thing to do.

Kieran: Precisely. And real estate. So, from a shareholder democracy point of view, that really brings a massive change, right? Because once the majority of shares are held… Or the majority of the share capital is not held by individuals, but by institutions, and by early 1970s, we’re talking about only 20% of the share capital held by private investors, then that’s not really shareholder democracy.

And interestingly, Margaret Thatcher, with her drive of bringing about a shareholder democracy, and with the large-scale giveaway flotations of state industries, she manages to bring the number up from around 3.5 million investors to 10 million. So, that seems huge, and it is a huge absolute increase. But what happened during the same time is that the growth of the institutions continues and the absolute increase in shareholders doesn’t do anything to reverse that relative decline of individual investment.

Merryn: Yes. And you also had, I guess, then people get… They buy these shares in one-off offers and maybe they hold it… A lot of them just flip them straightaway, right, and take the cash and buy something nice.

And some may have hung on to a portfolio, a small portfolio of shares, but there’s lots of evidence to suggest that they didn’t expand that. They didn’t think to themselves, I’ve got some BT and some British Gas now, so I think I’ll go out and I’ll buy some interesting small cap companies or anything like that. They just kept these shares. So, while it gave lots of people a stake in large companies, it didn’t make them feel so involved in capitalism that they took it further. Is that fair?

Kieran: I think that is fair to some extent, that a lot of the people who bought shares in, let’s say, British Telecom, British Gas, probably being the two most heavily advertised flotations, many of them then didn’t go on to buy shares in other companies, but they bought them, as Thatcher said, to put them in the bottom drawer.

But as you were saying, a lot of the people… And this is the other side of the story that is less commonly known, and that I write a lot about in my book, is, actually, of people going in and stagging these issues.

Merryn: You’ll have to explain stagging. Not everyone is an expert.

Kieran: So, the stag is actually the, next to the bull and the bear, probably the third stockmarket animal. And the stag goes into new issues and buys them not to hold on to the shares, but to quickly sell them as quickly as possible once there’s been an increase in the share price in early trading.

So, it’s normally quite a risky speculation. But in the case of all the flotations, and I referred to the most giveaway flotations earlier, it was pretty much a safe bet because everybody knew that the share price of these privatisation issues was deliberately set pretty low in order to attract sufficient buyers to secure the political success of these flotations.

So, everybody who was familiar with how the stockmarket works and how these issues worked, and everybody, basically, who had been reading the financial pages, of which there were many in Britain for the previous decades and knew exactly how to make a quick profit on these privatisation issues.

And if you look at the share register of these companies just after the flotation, and then a couple of months later, the numbers are really striking. So, there’s a decline of hundreds of thousands of investors, which is evidence that they all went into sell quickly. And then over the decade and with around 15 to 20 companies privatised, that number adds up to millions of investors, who basically didn’t buy these shares, as Thatcher said, to be enfranchised in the economic life of the nation, but to, really, to just make a quick killing and to make a quick buck.

Merryn: Go on holiday. Have a new kitchen. Buy a new car.

Kieran: Yes.

Merryn: A bit like the great PPI pay-outs of the last decade in some ways. OK, interesting. So, let’s talk a little bit about this idea of speculation because there’s a very clear divide, isn’t there, or we think there’s a clear divide, between people who are investors and people who are speculators, and you mentioned earlier this disdain for the idea that ordinary people might speculate. But the UK has a very long history of speculating.

I’m only guessing here, but I suspect we’re one of the countries where spread betting, for example, is the most popular. We love this stuff, and we’ve always loved it, haven’t we? We’re great gamblers.

Kieran: Yes, I would say so. Yes. Absolutely. And the reason why the book is called Playing the Market is because I heavily believe that one of the reasons why Britain has such a vibrant retail equity culture is not because the standard explanation of the City of London having been the financial nerve system of the Empire, and therefore Britain had a larger financial sector and automatically has a more vibrant stockmarket culture. As I explained earlier, the city was actually very much against this idea of popular capitalism.

But due to Britain’s gambling culture, a lot of people discovered the stockmarket not necessarily as a place to save for the long term, save for retirement, but as a way of having a bit of a flutter and discovering investment and speculation as a hobby that promises similar thrills of risk and reward as betting on horses or the football [unclear].

Merryn: Hopefully better than betting on horses.

Kieran: Yes. If you take this further, bear in mind that the stockmarket as such grew out of gambling, right? So, we have men sitting in coffee houses in the City of London, betting on which ship is going to come back from its colonial expedition, right?

So, what I’m trying to say in the book is really that the gambling element is not something parasitical or external to the stockmarket, as many in modern finance will have us believe when they speak about it officially. But it’s actually the founding element and it continues to be the driving force of financial capitalism.

And it’s the reason why, up until today, it’s so contested and so polarised. It’s the reason why so many people criticise it when they talk about casino capitalism and so on. But it’s also the reason why it attracts so many people and why it fascinates people.

Merryn: Have you ever looked at what was my favourite speculative bubble in the UK, the diving bell bubble?

Kieran: No. Please tell me. Which one was that?

Merryn: Brilliant bubble. Late 1700s. Hang on. No. Late 1600s, when someone found a wonderful shipwreck jam full of treasure, and it was incredibly exciting. But to get to the treasure, you need to get deep down. You need diving equipment.

And so, obviously, everyone started inventing brilliant new diving equipment, and everyone started hiring new ships to go out and get down into new shipwrecks. And so, of course, huge amounts of money were poured into these new diving bell companies and shipping companies. And most of the ships, of course, came back with absolutely nothing. It’s very hard to find shipwrecks. And once you found them, it’s extremely hard to get down to them.

But a few people won really, really big by inventing, very clever, diving bells and finding good wrecks. Fortunes were made, and many, many more fortunes were lost.

But I love it as a bubble because hugely speculative. Ordinary people very, very involved in it. Lots and lots of money lost. But when the dust cleared, just like with all great speculative bubbles, there’s a whole load of really tip-top diving equipment that you can use for other stuff.

So, it’s always my favourite. It’s not a very well-known bubble. And I was introduced to it by the financial historian Edward Chancellor, and it’s been basically my favourite bubble ever since. You can read about it in The Constitution and Finance of English, Scottish, and Irish Joint-Stock Companies to 1720, which I’m sure you have a copy of on your own shelves.

Kieran: Well, I did actually read Edward Chancellor’s book about the history of financial bubbles.

Merryn: I don’t know if it’s in his book.

Kieran: Definitely, I should read it again.

Merryn: Well, I’ll send you… I wrote a column about it in the FT. I’ll send that to you. Anyway, now we’re speaking as though we’re not recording a podcast. We are still recording a podcast, and we must move on.

Talk about today. We’ve just talked about speculation. And the last couple of years, we’ve seen this extraordinary rise in retail investors. And you’ve been very clever. You’ve managed to get a chapter into your book on that, the COVID-19 pandemic, and the return of the small investor.

Because I think you, like me, have been extremely concerned about, over the last 20, 30 years, the huge rise of the institution, the unstoppable rise of the institution, who now hold the majority of shares in pretty much every company across the world, and the retail investor as an individual barely exists. And everyone says, well, that doesn’t matter because you still hold shares because they’re in your pension fund, and in your fund that does this, in your fund that does that, and your ETF does this, and you’re part of this, and you’re part of that.

But you have no voice. No voice at all. You’ve effectively delegated your authority, your vote over capitalism to the Larry Finks, which I’m not sure is what most people intended to do, but they’ve done it.

But over the last two years, we’ve seen the individual investor come back, and a lot of the industry and a lot of the press have been quite snitty about it. Snitty about people doing all this stuff in Reddit and about what you call their vulgar language, language as colourful as vulgar, and their ideas of FOMO, fear of missing out. YOLO, you only live once, etc. But this to me just seems that it’s not new. It’s a return to the way stockmarkets are supposed to be. Is that how you see it?

Kieran: I don’t know. I might be a bit less optimistic about it than you. Sorry about that. But I definitely agree that the comeback that retail investors had over the course of this and last year, I didn’t see it coming. Many didn’t see it coming in the markets, and that’s why things like GME happened, I think, right? Where a couple of day traders organised on Reddit forums managed to inflict a short squeeze on hedge funds.

Merryn: That was so much fun.

Kieran: That was pretty spectacular.

Merryn: That was so much fun. It made my lockdown. I don’t know about you [overtalking] fantastic. What fun.

Kieran: Yes, to some extent, it did. And as you said, it did help me writing a conclusion to the book.

And then you had people like Nigel Farage saying that retail investors are now waging a war on the financial establishment. And Anthony Scaramucci, who was Donald Trump’s press secretary for ten days, I think, saying, tweeting that we’re now witnessing the French Revolution of finance. I think that was all nonsense because this idea that you could, in the long term, take on the hedge fund industry in this way is probably like believing that you could take on the gaming industry by going to the casino every day.

Merryn: I think you’re right on that. I don’t think that it makes sense to think that this new wave of retail investor can somehow play around with the hedge fund industry indefinitely.

But what I did find compelling about it was the way that individuals suddenly realised the result of this, even the people who aren’t participating in it, which, of course, is most people. In the end, it’s still a marginal activity. The people who weren’t participating in it and the people who participated in it suddenly realise what a share is, and what a share means, and that a share can come with influence.

Even if you don’t necessarily have the ability to use your vote… Which, by the way, I think you should have on a look-through basis in your funds, but you don’t at the moment. Even if you can’t do that, you can still move markets and affect markets. You still have some influence. Dumb money counts. What the experts like to call dumb money counts. And I thought that was an interesting shift.

Kieran: Agreed. Although, I didn’t quite see how this dumb money, as professional investors tend to call in a very disparaging way, I don’t see how the retail investors really organised themselves. I think there’s a really interesting debate around DSG, and about what companies we should invest in, and that’s going to stay, and that’s going to be a lasting impact, but I don’t really see… I didn’t really see any more concerted or more reflected or democratic way of engaging with markets.

Merryn: But you have hope. You have hope.

Kieran: I did see, of course, a lot of people of my generation entering the markets for the first time, and that is encouraging, and that’s probably going to stay, even though when there’s going to be a correction, probably a lot of people will burn their fingers. But what we do see from what history shows is also that after every bubble, these people tend to stick around and learn from it, and I believe that can be a good thing.

And it’s probably really going to be a lasting change because of the technology. Even though this whole payment for order flow model is now coming into regulatory scrutiny, the technological ability of trading shares from your phone, from your iPad, that’s going to stay, and that’s going to make it easier to invest.

Merryn: And that makes it look interesting to a lot more people than it did before.

Kieran: Certainly. Yes.

Merryn: One of the things that I’ve been looking at or thinking about is how individual investors can demand their voting rights from the institutions. Is there a way where you can have some kind of look-through influence on how your fund manages votes? And I’m beginning to think that there probably is a future in that. There’s a future.

Imagine the marketing for a big fund manager who said, do you know what? We’re really keen on democratic capitalism, and we run your money for you, but we want to know how you want it run. So, here are the votes that are coming up. Tell us. Tell us what it is you think we should do.

And I think there’s a bit in your book towards the end, where you say… It raises the question of whether the power and influence that small investors have proven they can garner collectively could be leveraged as perhaps more sustainable and constructive than hurting hedge funds. Activist small investors might one day organise taking action against excessive corporate pay. Surely, one day, they will do that, right? Against a lack of women on a company’s board. Against a business’s poor environmental record. All of this kind of thing.

That’s my hope, that what COVID might’ve left us, in the financial world at least, is a new understanding from the general population about their connection to the corporate world, and a new understanding about how they may be able to influence it without sitting on the road and stopping cars on the M25.

Kieran: I don’t expect more retail investors to show up at AGMs, but maybe that’s something where we could have a technological solution as well, that will bridge that physical gap, and make that physical effort easier, and to have a more effective voting system on issues like the ones that you just mentioned.

Merryn: This is interesting, isn’t it? Because there’s so much to talk about the digital revolution that has come about as a result of COVID, but AGMs would be an absolute classic of that. AGMs used to be quite exciting, and hundreds of people would turn up to them and shout and vote, and they were quite rowdy in the old days, right? And you’d come, maybe get lunch, a cup of tea and a biscuit, etc.

And now, AGMs are so dull. Nobody even turns up. They’re completely empty. I’m on a couple of boards, and occasionally, we can encourage people to come along and to have a cup of tea or occasionally lunch, etc. But with the idea that you can do all this digitally, people can watch an AGM and vote on an AGM while having a cup of tea and their own biscuit, which I feel might be quite revolutionary.

Kieran: There is always a moral debate in the stockmarket. And today, it’s focused a lot on, if we look at the ESG debate, it’s focusing a lot on what companies we invest in and how they behave. And that’s actually, if you look at it historically, a fairly new debate. There used to be far much more of a focus before that on how we trade. For instance, how long we hold our shares, and whether we just… And that brings us back to legitimacy and the defining line between investment and speculation.

Investing in companies was fine as long as you really held on to the shares of a company. And those people who fashioned themselves as genuine investors, and they would do so for the income-producing quality of stocks and shares. But anything that was done only for quick profit, getting in and out of shares, that was considered immoral. And it’s interesting how that kind of debate has completely vanished from today.

Merryn: It’s interesting that was still an issue even ten years ago, when we still had MoneyWeek on the go. Still do, actually. We wrote a lot about how long people held stocks for, and how the time that you held them had fallen, etc. But you’re absolutely right, that is no longer part of the moral debate. The moral debate now is all about the ESG overlay of however you invest, but it seems to me to be something that’s digging itself in for the long term.

Kieran: So, there’s an MP who gave a speech in 1960, in Parliament, and that was at the height of one of the biggest post-war bull markets, and there was a lot of panic in the city and in Westminster that too many people had started speculating. And this MP denounced speculating stocks and shares, the person who is not making a profit from income-producing qualities of shares, but who only buys and sells in order to make a quick gain. And that MP was Margaret Thatcher.

And it’s interesting, I think, also to point out the religious dimension of this, because it was not only the Labour Party that would always criticise the stock exchange as a casino and the emergence of a gambler state instead of a welfare state.

But this idea that the stockmarket’s culture and the stockmarket’s inner workings are actually completely at odds with Victorian notions of thrift, and hard work, and self-help, and deferred gratification, it also held really strong purchase in conservative and liberal communities.

And it’s only when that broke down, partly as a result because the Church of England itself in the 1950s becomes a major player and, for some time, the second largest shareholder after Prudential, that that religious critique of the stockmarket breaks down and brings down a lot of the cultural restraints towards investment, whether that… Investment becomes far more popular.

So, at some stage, at some stage, somewhere in the book, I say that the Church of England actually did more to popularise investment than the London Stock Exchange at that time, because the London Stock Exchange was so paternalist and so anxious around the amateur investor and the small speculator.

Merryn: That’s so interesting. Do you think if the Church of England suddenly announced that it was investing 10% of its portfolio in cryptocurrencies…

Kieran: I’m pretty sure that that would drive up the…

Merryn: Price of bitcoin quite substantially.

Kieran: Price of bitcoin. At least as much as an Elon Musk tweet.

Merryn: Very much so. That’s really interesting. Anyway, listeners, for more of that kind of thing, £75 and a copy of Playing the Market is yours. I highly recommend it. Kieran, thank you so much for joining us today. Hugely appreciate it.

Kieran: Thank you, Merryn. It’s great to be on your show.

Merryn: Kieran, do you have a Twitter account or anywhere such as that where readers can follow you and learn more of your thoughts?

Kieran: Unfortunately, not, no. I try to stay away from social media.

Merryn: Oh well. Never mind. At least we’ve got plenty of Twitter accounts over the MoneyWeek. You can follow us on Twitter @MoneyWeek. You can follow me on Twitter @MerrynSW. You can follow John on Twitter @John_Stepek.

For more on MoneyWeek as a whole,, where, of course, you can sign up for our brilliant daily e-letter, Money Morning, largely written by John.

Thank you so much for joining us. Don’t forget to buy Kieran’s book. And do rate the podcast on your podcast provider of choice if you have a moment. It’s only thanks to your wonderful reviews that we have the ability to get in such high-quality guests. Thank you, Kieran. Thank you, everybody.