Customer Reviews

Devil Take the Hindmost: A History of Financial Speculation

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A wizened wag at an investment firm once warned me to start looking for the sell tickets as soon as I heard the words "This Time is Different."

In my short experience as an investor, it was some of the most sage advice I have received. Edward Chancellor book arrives at the same conclusion but provides more foundation to recognize the bubbles of speculation.

Investment bubbles never change. Yet, for the investor or trader caught up in one, they remain difficult to identify. According to modern economic theory, markets are efficient and speculators are rational opportunists intent on maximizing their wealth.

Chancellor, a former investment banker and historian, disagrees. More than fear and greed drives speculators, they motivated by deeper compulsions and aspirations. Speculation, he says, can only be understood within a social context and that its history cannot be a simple description of economic affairs. It is important to understand the behavior and attitudes of politicians, since the laws governing markets are written and enforced by governments.

He traces the origins of speculative fever back to ancient Rome and follows the thread through Holland's tulip mania in the 1630s and London's stockjobbers 70 years later.

The book ends with an insightful analysis of the Junk Bond era here in the United States, the Japanese bubble and the near collapse of Long Term Capital Management. It is a must read for every serious investor.

The heading for one chapter of Edward Chancellor's fine book quotes the investor Sir John Templeton: "The four most expensive words in the English language are 'this time it's different.'" Templeton's words sum up the most important lesson to be learned from this outstanding history of speculation, which focuses in particular on those manic episodes called bubbles, in which the prices of assets are driven to levels far above those justified by the assets' underlying fundamentals.

Chancellor's account, while not a comprehensive study of speculation, thoroughly examines major speculative periods from the tulip mania of the early 17th century, to the Japanese "bubble economy" of the 1980's. Three repeating motifs characterize these speculative episodes. First is the irrationality of financial markets, especially the way in which people of all eras are susceptible to the euphoria which inflates a bubble. Second is the constant recurrence of manipulation of markets by the greedy and unethical, the likes of Jay Gould and his accociates.

The third and most important theme is the existence of parallels between past speculative bubbles and conditions in our own time. Chancellor convincingly argues, for example, that the internet mania of today is similar in many ways to the British railway bubble of the 1840's.

I strongly recommend this book to anyone with an interest in financial markets or their influence on history. The only, slight caveat I would offer is that it helps a reader to have at least some knowledge of the language of financial markets, as Chancellor at times tosses terminology at readers without offering a clear definition.

How can one justify the current market valuations of money-losing Internet ventures, and even of some 'blue-chips' trading at 50+ times earnings? One would be surprised to find some of the most eye-opening answers to this question in the investing behavior of ancient Romans, 17th century Dutch, Victorian Englishmen and Gilded Age Americans. That's why this book is excellent reading for those who believe human nature is remarkably uniform when it comes to greed and financial speculation. On the negative side, the author sounds too 'opinionated' sometimes, as when he implies that the recent rebirth of classic economic thought and monetarism serve merely as intellectual "window-dressing" for a wave of perverse speculation. Were it not for this minor fault, I would certainly rate it a 5-star book. Read it and enjoy.

Chancellor's book is a highly entertaining history of market speculation taking in everything from the Tulip Mania of 17th century Holland and the English South Sea Company bubble to Japan in the `80s, the Savings and Loan Rip Off, Michael Milken's Junk Bonds, the Long Term Capital Management fiasco and the Internet craze of the late 1990's. Chancellor even covers the 90's art market.

One constant stands out about market piracy: what is new is old - only the names and games have changed. Markets have always been manipulated and always will be. The reforms that follow in the wake of each bubble plant the seeds for the next. Often because the legislators who enact the reforms are beholden to those positioned to benefit from the loopholes.

There are several phrases that seem to pop up with every bubble:
"This time it's different."
"It's too big to fail."
"The business cycle is no more," or some nonsense about reaching a plateau of permanent prosperity.

Reading this book will make you think twice about investing in the market.
It'll make you doubt the foundation of the efficient market hypothesis.
It'll show how often the experts are wrong.
It'll show how often Nobel Laureates in Economics turn out to be fools.

It will make you think three times about investing in Japan.
Four times about investing in Latin America.

And you'll run away screaming from derivatives of any stripe.
In fact, one wonders why the whole shooting match hasn't imploded yet, ala Baring's Bank or LTCM.

Devil Take the Hindmost is a fun read. More important, the next time a Mania strikes - and it will - this book and a general understanding of the history of speculation just might just save you from rushing over the cliff with all the other lemmings.

If you want a lot of well-selected quotes covering the history of financial speculations, this is a good book. But if you want a postive story about the historical development of finance and how speculators carry new developments to an extreme, then I would suggest Money, Greed, and Risk by Charles R. Morris. I read Morris' book before this one, and found this relatively disappointing. I have no connection with either author.

Chancellor is a rare breed: an economic historian well versed in both the nitty-gritty of financial analysis, and in the "reading" of social and intellectual history. This book presents plenty of both. Its author is extremely well-read ("seems to have read everything," as one professional reviewer wrote) on both fronts, and interweaves the two methods of argument admirably. Plentiful first-person quotations -- some from famous writers and intellectuals who speculated in financial markets of their time -- provide solid evidence for Chancellor's argument, as well making very entertaining reading about the personal financial activities of figures such as Alexander Pope and Daniel DeFoe.

Chancellor also stakes out his territory intellectually and academically. This is not just a ho-hum journalistic history book. It is well supported with theory, argument, and analysis. For example, Chancellor attempts to discredit economic historians who sit too far in the "social history" camp, as well as those who sit too far in the "rationality" camp. For example, Chancellor gives the "tulipmania apologists" (rational-expectations theorists who claim there was nothing irrational about tulipmania) quite a thrashing. On the other hand, he does draw upon theoretical tools such as liquidity premiums and moral hazard to explain some financial manias, and is well versed in all forms of financial analysis. I failed to be entirely convinced by many of Chancellor's arguments, but nonetheless, I found them stimulating and thought-provocative.

Because "financial speculation" encompasses almost all financial activity, this book encompasses enough to be a standalone primer on the history of financial trading.

As an added bonus, Chancellor is a very readable, and even clever and amusing, writer. His occasional tongue-in-cheek remarks add life to some (necessarily) dry discussions of the history of financial instruments.

This is an excellent history of finance, not just of financial speculation. Although I read this book for pleasure, not as an "investment book," it also has some wise lessons for investing, although the comparisons of internet stocks to Dutch tulips are by now a tired cliche (and, mercifully, Chancellor doesn't dwell too heavily on those comparisons).

+++++

This extremely well researched book, by historian Edward Chancellor, is about the history of financial or stock market speculation. The line distinguishing investment, financial speculation, and even gambling is not absolutely clear:

"[S]peculation is the name given to a failed investment and...investment is the name given to a successful speculation...The psychologies of speculation and gambling are almost indistinguishable: both are dangerously addictive habits which involve an appeal to fortune, and often [are] accompanied by delusional behavior and are dependent on success for the control of emotions."

The title of this book "Devil take the Hindmost" comes from a phrase in the 1720 writing of an "anonymous pamphleteer." This phrase means "Let every person follow self-interest, leaving others to fare as they may."

Chancellor takes us through significant periods of stock market manias or "speculative manias or bubbles." Some examples include:

(1) the Dutch Tulip Mania of 1637
(2) the British South Sea Company Bubble of 1720
(3) the U.S. bull market of the 1920s
(4) the U.S. bull market of the 1980s
(5) the Japanese Bubble Economy of the late 1980s.

All of the above events have one thing in common: the mania is always followed by a collapse, or more eloquently, the bubble eventually bursts. But as you read this book, you will discover that investors and speculators don't seem to learn from the lessons of the past. Why? Because as Sir John Templeton stated, there is this manic belief that "this time it's different."

Throughout this book, you'll come across words such as these:

mania or euphoria, bubble, crash or collapse, suicide, lotteries, gambling, speculation, irrationality, political influence, corruption, fraud, bankruptcies, bank failures, greed, profit, wealth, power, illness, anxiety, nervous breakdown, insider trading, capitalists, materialism, risk, murder, debt, and market manipulation.

Chancellor also provides other interesting historical information in his narrative besides just historical information about speculation. For example, he tells us the true story of where the stock market terms "bull" and "bear" came from and what Mark Twain thought about investing and speculation.

Contrary to belief, this book is not biased. In the epilogue of his book, Chancellor tells us the benefits that come from speculation. However, from reading the initial chapters of this book, it seems to me that these benefits come at a very high human cost.

The only problem I had with this book is the plethora of footnotes. They occur on every second page or so. While some of the information in these were very interesting, I found that I got tired of being continually distracted by these footnotes and so I eventually gave up reading them.

Although not completely necessary, it would be helpful to know some basics about the stock market and investment when reading this book. Chancellor does a good job explaining most things but he also assumes that the reader knows some basics.

Finally, this is a unique book that thoroughly explains the history of financial speculation. Whether you're an investor or not, you'll learn a lot especially about human nature.

RECOMENDATION: Invest in this book!!

(first published 1999; preface; 9 chapters; epilogue; notes; references, acknowledgements; index)

+++++

It is helpful to our understanding of financial speculation early in the 21st century to view it within an historical framework. Chancellor provides such a framework and more...much more. In the the initial chapter ("The Bubble World"), he explains the origins of financial speculation and then shifts his attention to a series of famous (sometimes infamous) situations throughout three centuries. As Chancellor explains, "I concentrate on occurrences of speculation in the leading economic powers of the day, from the Dutch Republic in the seventeenth century to Japan in the 1980s, interspersed with the occasional look at speculation in the present day. I believe that speculation can only be understood within a social context and that a history of speculation cannot simply be a description of economic affairs but must also be something of a social history." Joel Mokyr has a similar objective in The Lever of Riches in which he examines various interrelationships between technological creativity and economic progress since classical antiquity. Both he and Chancellor present information and develop their ideas within what could be called an "historical infrastructure." They succeed admirably.

In Chapter 7, as Chancellor concludes his examination of "The Gilded Age", he quotes the American economist H.C. Emory who wrote that "whereas gambling consists in placing money on artificially created risks of some fortuitous event, speculation consists in assuming the inevitable risks of changes in value." For Chancellor, speculation in the late-nineteenth century "brought more harm than good and transferred property from the hands of the many into the pockets of the few." This is also a useful perspective on the subsequent "Crash" of 1929 and thereafter, a volatile period which Chancellor also analyzes with eloquence as well as insight.

It is an even more useful perspective on the economy of a country such as Russia in the early-21st century. As Chancellor correctly points out in the Epilogue, "The issue of speculation in emerging markets and the unfettered trade in foreign currencies is the most immediate and vexing problem faced by policymakers." For me, Devil Take the Hindmost is an absolutely indispensable guide to more than three centuries of stock market speculation. He focuses on a broad range of speculators (eg Del Defoe, Benjamin Disraeli, Jay Gould, Ivan Boesky, Michael Milken, and Hilary Rodham Clinton); in process, he suggests that the primary motives which drive these and other speculators are far more complicated than many of us (I at least) had assumed...and, as often as not, these morives reflect "the national character" of the country in which a speculator succeeds or fails.

I will admit, from the beginning, that I am bearish about the current stock market and tend to think that we are in the midst of a bubble which could burst any day now. Nevertheless, while Edward Chancellor's book reaffirms many of my beliefs, it will prove to be equally interesting reading for those who are wholly optimistic about the current state of the stock market.

This book provides a comprehensive and fascinating history of stock market speculation from its earliest days. Prior to reading this book, I had a vague knowledge of events such as the "Tulip Bubble" and the "South Sea Bubble" but Chancellor discusses these in fascinating detail, consistently using modern techniques of economic analysis which the reader can then apply to draw their own conclusions about today's financial status quo. Chancellor looks at arguments raised on all sides of academia about the role of stock market speculation to overall economic well-being. This is not, by any stretch of the imagination, a book which aims to promote one single view - while trying to persuade readers gently that we currently find ourselves in a period of financial excess, the author leaves readers to make up their own minds.

Some people may find some of the author's discussions slightly too technical and I did approach this book from a background of fairly deep knowledge of economic theory and the financial world. Nevertheless, even for the novice, certain technical arguments will not completely overwhelm the interesting subject matter of this book.

I would consider this book essential reading for anyone who is involved in the stock market today - not as a warning of things to come but only to reinforce the notion that those who do not understand history are doomed to repeat it.

This is a sobering tome published at exactly the right time. Unfortunately I was too busy salivating at the prospects of quadruple-figure appreciation when I bought Priceline.com at $104 to read it when it came out last year. Now reading it makes for a nice penitence as I contemplate the error of my financial ways while filling out forms for a second mortgage on the ranch.

Just joking. Actually this is a readable and entertaining account from Roman times to the modern hedge fund mania. The usual financial delusions are covered, the tulip mania, the South Sea bubble, the crashes of 1929 and 1987, etc. Chancellor does especially nice surgical work on the Japanese bubble economy of the eighties. The operative mechanism is at first GREED, an emotion that blinds investors, just as jealousy blinds the cuckolded or love the lover, into seeing delusion instead of reality, and persuades them to pay high prices for something of little or no value. Then, when it is seen that the emperor has no clothes, that dot.com megamegabucks has no earnings and isn't likely to have any--ever--the value of the trifle paid so dearly for, begins to fall. Now the emotion of FEAR takes hold. This also blinds the investor. The crash begins, the bubble bursts, and overly-margined plutocrats jump despondently out of the windows of high-storied buildings...

Or shoot up brokerage houses with live bullets. Notice however that when Internet stocks went very far south of the Cape of Good Hope this last year, no bubble burst; rather the sector experienced the slow deflation characteristic of a tire going flat. This was mainly because the margin requirements at brokerage houses are now fifty percent instead of the ten percent that prevailed during the Roaring Twenties. Chancellor makes note of this and other differences that make bursting bubbles less painful perhaps, but no more unlikely since the fundamental human emotions underlying the mechanism that produces speculation has not changed.