Financial history


Dear Chairman | Jeff Gramm

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Published in: 2015

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Dear Chairman is about shareholder activism in the United States over the past century. The book is written by Columbia professor and fund manager Jeff Gramm and consists of eight studies based on investor letters, newspaper clippings and interviews. According to Gramm, the starting point for shareholder activism was Benjamin Graham’s collision with the Northern Pipeline in 1926. As America then became richer and shareholding more widespread, more and more disputes over corporate control broke out.

STARTS OUT IN THE 1920SIn 1926, Benjamin Graham discovered that the profitable Northern Pipeline (NP) had $90/share in bonds while the stock price was $65. NP held its AGM in Oil City, Pennsylvania, far from the company’s headquarters – probably so that the board and management would get work undisturbed. Graham went there but had forgotten to pre-register his case and had to go home unheard. After working with major shareholders and after several rounds with the board, Graham got hold of two of five board positions. He then got the company to distribute the excess capital to the shareholders.

THE SALAD-OIL SCANDAL IN THE 1960S. Buffett started his partnership in 1956, and experimented in the beginning with everything from activism to short selling and pair trades. A classic story is that of American Express’s (AE) salad-oil scandal that erupted in 1963. The share price fell sharply and Buffett realized that the scandal did not damage AE’s highly profitable core business and invested 40% of the partnership’s capital in the company. He then began to persuade management and the board not to fight against the compensation of the swindlers. Legally, AE did not have to pay any compensation and shareholders loudly began to complain that a payment would still take place. Buffett realized that a lack of compensation could damage AE’s good brand and customer confidence and in the long run overthrow the company. If they took a big “one off”, AE would quickly be on the track again – which got to be the case.  

THE RANSOM LETTERS OF THE 1980S. The 1980s were the decade of “corporate raiders” and the big names on Wall Street were Carl Icahn, Michael Milken and T. Boone Pickens. “Bear hug letters” (an unwelcome but generous takeover bid), greenmail (targeted buyouts by individual shareholders), hostile takeovers (takeover attempts without board / management approval) and poison pills (a protection against hostile takeovers – often via the articles of association) were new words used extensively in the financial press. The activist investments of the decade were to a large degree made possible by cheap capital from Michael Milken. He was the “father of junk bonds” (high-yield bonds with little security) and through this built up a fortune. After a too long time in the grey zone, the happy 1980s resulted in 10 years in prison and a $600m fine for Milken. In the end, however, he came out after only two years.    

THE TOWN-HANGINGS OF THE 2000S. In the late 1990s and early 2000s, hedge fund manager Daniel Loeb introduced a new type of activism – public shaming. Loeb’s approach was to take a position of power in problem companies and replace inefficient management to reverse the negative development. To get the attention of key people, he sent out open letters in which he clearly expressed how management exploited the shareholders through passivity, dishonesty, or laziness. The open letters contained everything from personal attacks to curse words and proved to be highly effective. Loeb had found the key point of key people – if there is one thing CEOs and board members care about, it is their reputation.

”Sometimes a town hanging is useful to establish my reputation for future dealings with unscrupulous CEOs”
– Daniel Loeb

ACTIVISM IS NOT ALWAYS A GOOD THING. Studies have shown that activism is generally value-creating. However, not all outcomes will be good. Gramm takes up the example of BKF Capital, where activists ran a marginally profitable fund company into non-existence. The activists felt that earnings were burdened by unusually high staff costs and saw potential for quick gains if wage levels were trimmed. But when wages were reduced, the staff disappeared and with the staff, the investors disappeared. The fund company’s AUM fell rapidly and after only a few years the business was wound up.

ACTIVISM AS AN ASSET CLASS. According to Gramm, activism entered the institutional world in the late 1980s after GM, through greenmail, bought out major owner Ross Perot. The purchase took place at a large premium and Perot’s billion profit was financed at the expense of other shareholders. Thereafter, the major institutional shareholders increasingly began to side with the activists. It was also in connection with this that greenmail was banned. Nowadays, even normally passive institutions are open to follow successful activists.


The Flaw

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Documentary from 2010. Yale economist Robert Shiller and other experts explain the 2008 economic downturn. Available on Amazon Prime.


Hot Commodities | Jim Rogers

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Published in: 2004

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The book was published in 2004 by financier and world tourist Jim Rogers, who co-founded the Quantum Fund with George Soros. Between 1970 and 1980, the fund had a CAGR of 46% versus S&P 500’s 4%. The fund years resulted in that Rogers could call himself financially independent by a good margin, after which he retired at the age of 38. He has since traveled around the world twice, once by motorcycle and once by car. The car trip has given him a place in the Guinness World Book on the topic “Most countries visited in a continuous journey by car”.

NEGATIVE CORRELACTION WITH STOCKS. During the 20th century, there were three bull markets in commodities; 1906–1923, 1933–1953 and 1968–1982. Over the past 130 years, equities and commodities have alternated in regular cycles lasting an average of 18 years. During the 1970s, commodities performed the stock market, but the following decade the outcome was the opposite. Between 1959 and 2004, commodities had a higher return, and slightly lower volatility, than the stock market. Rogers explains the negative correlation with the fact that when raw materials are cheap, companies can generally enjoy high margins. When commodities become more expensive, it hits the companies’ margins, which leads to depressed share prices.

ROGERS INTERNATIONAL COMMODITY INDEXIn 1998, Rogers began to worry about the valuation of the stock market and talked about investing in commodities and how the fast-growing Chinese market would act as a locomotive for commodity prices. Commodity prices were then, also adjusted for inflation, lower than at any time since the depression of the 1930s. He then created his own commodity index in which he also invested his capital ahead of the upcoming round-the-world trip. Rogers was right, between 1998 and 2008 commodity prices rose sharply. Since then, according to Rogers’ index, commodities have had a negative development until today [2021].

A FORGOTTEN ASSET CLASS. In 2004, the turnover on the world’s commodity exchanges was many times greater than on the stock markets. Oil had the highest turnover. Coffee has on most occasions qualified as the second most traded commodity, despite the fact that only 20% of the world’s population are coffee consumers. According to Rogers, commodities should not be ignored and he thought that he became a better equity investor with knowledge from the commodities sector. By understanding the mechanisms in the raw materials sector, an investor can better understand how they in the next stage affect everything from food producers to real estate companies.

BACK TO BASICS. When Rogers analyzes commodities, he goes back to business 101 – supply and demand. He uses the CRB Commodity Yearbook and studies supply, demand, how large the reserves are and whether there are producers in areas where there is unrest. He also examines which industry is in demand for the raw material and what substitutes there are if prices rise too sharply. In general, commodities perform well during times of high inflation.

TRADING COMMODITIES = TRADING FUTURES. There are three players in the commodities market: producers, buyers and speculators. The producers are the mining companies, the forest companies, and the oil companies. The buyers are the ones in the next step in the value chain who use the raw material. The speculators are the investors who bet on the commodity price, but who have no interest in using the commodity. The speculators therefore never trade in the futures during the last trading month, as they do not want to be forced to take deliver on a batch of commodities.

COMMODITIES > COMMODITY-RELATED COMPANIES. When financial advisers talk about commodity exposure, it is usually through commodity-related companies. However, Rogers believes that the raw material companies are significantly more risky than the raw materials themselves. This is also strengthened by a study from Yale which showed that commodities over time performed better than the commodity-related companies. One difference between commodity-related companies and commodities is that the former can go to zero, which is not possible for the latter. The former also depends on the quality of management and the company’s indebtedness.

A COMMODITY-BOOM CAN BE A BOOM FOR A COUNTRY. When strong periods in commodities begin, it has a positive effect on the commodity-strong economies in many respects. A profit-generating raw material industry seeps through the entire business community, which leads to generally good times and strengthened currencies. As prices for copper, lead and other metals rise, the consequence is that the economies of countries such as Canada, Australia, Chile and Peru are to expect good times.


Reminiscences of a Stock Operator | Edwin Lefevre

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Published in: 1923

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Reminiscences of a stock operator was first published in 1923 and is seen as a classic in investor circles. The book is based on the life of investor and trader Jesse Livermore but built around the fictional speculator Lawrence Livingston. Many concrete tips for stock trading are interspersed with the story of Livermore’s roller coasters in life.

NOTHING IS NEW ON WALL STREET. What is happening in the stock market today has happened before and will happen again. We humans run on greed and fear and cannot stay away from speculation. In every boom, private investors fail to turn paper profits into money and in every crash they sell at the bottom.

“When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature.”

HAVE THE WISDOM TO STAND ON THE SIDELINES. Only a fool trades all the time. There is no referee who says that we must constantly be on the playing field. The intelligent investor only trades when the odds are in his favor. The “action bias” that investors generally suffer from drags many otherwise intelligent people into ruin.

”There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. It never was my thinking that made the big money for me. It was always the sitting. Got that? My sitting tight!”

THE VALUE OF LOSSES. Investors will repeatedly make mistakes that lead to losses. As long as no mistake leads to total loss, these are good learning opportunities. During the career, the investor accumulates lessons learned about what to avoid and evolve from these mistakes if these are not repeated. Livermore saw losses in the market as a fee for experience and knowledge.

“There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win.“

DON’T TAKE TIPS. If you buy shares on tips from your neighbor, you also need his tips when it’s time to sell. You become dependent on a party that you certainly do not have access to in the future. In addition, it is difficult to keep a straight course if the share price falls sharply and you yourself are not familiar with the investment. The risk of being scared away when it is darkest is significantly greater than if it is a self-chosen stock.

DO NOT SKIMP ON THE SPREAD. Livingston learned early on that it was a “fools game” to try to catch the last cents in the spread. He believed that this – as early as the beginning of the 20th century – had cost stock traders enough millions of dollars to build a highway across the American continent.

“One of the most helpful things that anybody can learn is to give up trying to catch the last eighth — or the first. These two are the most expensive eighths in the world.”

TAKE THE CHANCE WHEN IT COMES. When the opportunity arises to follow one’s analysis, one must take the chance. You sell when you can – not when you want. A major investor cannot sneak out of a position, he must wait for liquidity. By observing the trading volumes and trying your hand, trading skills can be refined over time.

THE REAL JESSE LIVERMORE. Livermore was born in Massachusetts in 1877 and grew up in poor and simple conditions. He began his trading career as a 14-year-old by taking a job as a “stock price writer” with a stockbroker in Boston. He learned to see patterns in stock trading and began to “bet” on stocks in “bucket shops” (a type of betting business for the stock market). As a 15-year-old, he resigned from his job and was then a professional stock trader for the rest of his life. The first time he came to Wall Street, he lost everything, after which he had to return to the “bucket shops” and rebuild his portfolio. Livermore lost several times, but always recovered through short-term loans. The peak of his career was after the great crash of 1929 – Livermore had then been short shares and was good for $100m. By the time he committed suicide in 1940, at the age of 63, his fortune had shrunk to $5m.


Rouge Trader

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In 1995, The Far-Eastern money market is still emerging, and the scene is set for one naive young Englishman to appear out of nowhere to bend the rules. Working from the Singapore office of the Queen’s Bankers, Nick Leeson would appear to have everything going for him – a position of trust, money and a beautiful new bride. But he also has an unchecked driving ambition and an insatiable appetite for the highlife. But before long, his reckless gambling on the open market will spiral completely out of control and lead to unprecedented trading losses that he must somehow cover up and keep from his unsuspecting employers and trusting wife.

Based on a true story.


Inside Job

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This documentary goes in depth to map the corruption that permeated Wall Street and led to the global financial crisis of 2008. Matt Damon is the narrator in this film, which won an Oscar for best documentary in 2011. Available on Netflix and Youtube (buy) among other places.


The Birth of Plenty | William J. Bernstein

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For millennia, the road to wealth was to win wars and plunder. Until 1820, world growth per capita was approximately zero. During the century after the fall of the Roman Empire, prosperity in Europe had actually declined and most critical technologies had disappeared – the most important being cement, which would not be rediscovered until much later. But not long after 1820, prosperity began to increase, and for each generation, life became noticeably more comfortable. During the 172 years after 1820, the world’s GDP increased eightfold. During the same 172-year period, GDP in the United Kingdom rose 10x and in the United States 20x. Economic growth is synonymous with increased productivity, which is almost exclusively the result of technological progress.

A summary of the book can be read here.


GameStop: The Wall Street Hijack

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In January 2021, the news of GameStop and its soaring stock price made headlines around the world. This is the story of how a group of amateur traders played out the Wall Street pros in their own game. Hosted by Jordan Belfort. Available on Discovery.