In the 1600s, the world’s first stock exchange was established in Amsterdam. In 1688, a trader by the name of Josef de la Vega wrote “Confusion Of Confusions” – the world’s oldest surviving account of trading stocks. The book is an amazing record of the business. Yet despite being written over 300 years ago, it sounds eerily familiar to our markets today.
First off, De la Vega has no illusions about the dark side of the industry. He describes the Dutch stock market as “the fairest and most deceitful in Europe…the finest and the most vulgar on earth.” He laments that “this business has been converted into a game, and merchants [concerned in it] have become speculators.” And “what is worse, a portion of the stock brokers have become card-sharpers [hustlers, exploiters]”. Yet, “it is great error to assume that you can withdraw [temporarily] from the Exchange or that you can gain peace of mind when you cease to meet with the other speculators…He who entered the circle of the Exchange is in eternal agitation and sits in a prison, the key of which lies in the ocean and the bars of which never open.”
With this backdrop, he writes about “some precepts” that he lives by:
1) “Never give anyone the advice to buy or sell shares” since the “most benevolent piece of advice can turn out badly”
2) “Take every gain without showing remorse about missed profits, because an eel may escape sooner than you think”. Put another way, “it is wise to enjoy that which is possible without hoping for …the persistence of luck.”
3) “Profits on the exchange are the treasures of goblins. At one time they may be carbuncle stones [gemstones], then coals, then diamonds, then flint-stones, then morning dew, then tears”. I guess he means investment gains are not permanent.
4) “Whoever wishes to win this game must have patience and money, since the values are so little constant and the rumours so little founded on truth. He who knows how to endure blows without being terrified by the misfortune resembles the lion who answers the thunder with a roar, and is unlike the hind [deer] who, stunned by the thunder, tries to flee.”
The Mind Of a Trader
He has a keen eye on the psychology of the traders. Speculators “are very clever in inventing reasons for a rise in the price of shares on occasions when there is a declining tendency.” And “when speculators talk, they talk shares…when they look at something, it is shares that they see…But what surpasses these enormities…is the fact that the speculator…struggles against his own will …and is at odds with his own decisions…If, for example, there arrives a piece of news which would induce the speculator to buy, while the atmosphere prevailing at the stock exchange forces him to sell, his reasoning fights his own good reasons…”
He goes on to talk about price formation: “the expectation of an event creates a much deeper impression upon the exchange than the event itself. When large dividends or rich imports are expected, shares will rise in price; but if the expectation becomes a reality, the shares often fall; for the joy over the favourable development and the jubilation over lucky chance have abated in the meantime.”
Bulls and Bears
He splits traders into two classes. “The first class consists of the bulls. They start their operations by purchases…They always desire a rise in the price of the shares; they hope that by reason of good news the market will be suddenly stirred up, and that prices will rise high rapidly. The second faction consists of the bears…The bears always begin operations by sales…These bears must be fled like the plague, and one must take their part only on extraordinary occasions”
More colourfully, he describes them as follows:
“The bulls are like the giraffe which is scared of noting…They love everything, they praise everything, they exaggerate everything…the bulls make the public believe that their tricks signify wealth and that crops grow on graves…The bears on the contrary, are completely ruled by fear, trepidation and nervousness. Rabbits become elephants, brawls in a tavern become rebellions, faint shadows appear to them as signs of chaos.”
Finally, it was remarkable how sophisticated the instruments available to trade were: they could trade cash markets, forwards and even options:
[On managing downside]: “The Dutch call the option business “opsies” a term derived from the Latin word “optio”, which means choice, because the payer of the premium has the of delivering the shares…Give “opsies” or premiums, and there will only be limited risk to you, while the gain may surpass all your imaginings…it is impossible to lose more than the price of the premium
So, looks like nothing much has changed!