Good companies

    3 November 2016

    A year or so ago a friend gave me a fabulous present: a full set of the 1968 edition of the three volumes of The Constitution and Finance of English, Scottish and Irish Joint Stock Companies to 1720 by William Robert Scott. I accept that not everyone would find this fabulous. But if you have even the faintest of interests in how modern capitalism came to be organised as it is, you’ll be hanging on to the edge of your seat long before you get to volume two.

    The idea of a company existing in which you could own a fractional part — or share — first appeared in the British Isles in the mid-1550s — with the Russia (or Muscovy) Company being the first properly successful version (it had its ups and downs but hung on until 1917). It was fast followed by Mines Royal, the Mineral and Battery Works, the East India Company, the New Scotland Company and many thousands of others in 200 years of excitement, experimentation, boom and bust (a large number of chapter headings start with the words, ‘The crisis of…’ ). I have favourite bubbles from the book — the diving bell bubble of the 1690s comes top — and favourite companies, too: in 1676, the Governor and Company of Adventurers of England Trading into Hudson Bay managed to turn £650 into £19,000 by trading furs with Indians.

    But the key reason to read Scott’s book is for the extraordinary detail and the understanding that it brings of how ‘early companies were affected by, and in their turn affected the national life’ at every turn. Companies interacted with the state endlessly — helping monarchs raise money, running monopolies with them (companies routinely had a go at applying for the ‘little further encouragement’ monopolies gave their businesses), lobbying for licences and loans, and so on.

    Without the rise of joint stock companies and the markets on which to trade their shares, the risk of the foreign adventures and start-ups that made Britain a great trading nation would have been impossible for anyone to take on. And without governments to chuck some regulation into the mix, the risk of investing in any of those adventures would have been even higher than it was.

    And it was already high. Note the words of a Mrs Mary Butterfield on some 1719 accounting shenanigans affecting the price of her shares in Hudson Bay: ‘I cannot tell you how it is to be done for that passes my wit,’ she wrote, ‘but in short, the value of our interests is to be trebled without our paying a farthing.’ A chapter to read if you need a reminder on why company accounts only ever tell you part of every story.

    The only shame of Scott’s book is that it stops in 1720 with the collapse of the South Sea bubble — and so leaves a 225-year gap before the story of the equity markets is picked up in The Stock Market: 50 Years of Capitalism at Work by John Littlewood. Still, once you get into Littlewood’s book you will find you are on familiar ground: it is as intensely detailed as Scott’s.

    It takes you from the herding behaviour of early 1950s fund managers — shunning equities and holding cash mountains as a ‘defensive mechanism that deflects criticism for failing to read market trends when everyone fails together’ — on to the cult of equity that has lasted us almost ever since, via the horrors of the 1970s, the Big Bang and privatisations of the 1980s and the rise of London in the 1990s to be the ‘hub of the wheel’ of finance.

    Along the way, the appearance of the market has been completely transformed: ‘The daily routine in the 1950s of drifting into a splendidly furnished partners’ office has become in the 1990s a mass meeting for several hundred in the amphitheatre of the modern trading floor.’ But the essence of it remains the same: creative accounting and investor psychology get us just as many crisis chapters in Littlewood as in Scott.

    These aren’t how-to-invest books. They are books about the history of the systems we use to shift capital around. But read them and you will also most certainly end up a much better investor.