A view from Dave Trott: Investing in the emperor's new clothes
A view from Dave Trott

Investing in the emperor's new clothes

In 1711, the debt of the government of Great Britain was out of control.

It was around £30m – at the time, an unbelievable amount of money.

Until then, all government debt had been held by the Bank of England.

But in order to avoid a monopoly, an alternative was needed.

So a new company was formed: The South Seas Company.

All creditors would exchange government debt for shares in this new company.

To make it appear profitable, it was given a monopoly on all trade with South America.

The only problem was, there wasn’t any trade with South America.

The Spanish owned all the ports and they wouldn’t allow it.

But that didn’t matter – the new company was backed by government debt, what could go wrong?

People hurried to buy stock, which drove the share price higher and higher.

Which meant it rose way beyond the backing of government debt.

In fact, 10 times more, from £100 to £1,000 in just one year.

Actually, the only real income the company had was the rising share price, which had to be supported artificially.

So MPs were allowed to buy stock but only pay for it if, and when, they sold it.

This gave them the incentive to make sure the share price kept on rising.

People were encouraged to buy stock for 20% down and make payments every two months.

As the price rose, they sold their stock to buy more, until most owned five times what they could pay for.

The company even lent investors £3,000, a vast sum, to buy shares.

The share price rose so fast it became known as The South Sea Bubble.

The company was valued at £300m, 10 times the amount of government debt it held.

In other words, 10 times what it was actually worth.

It couldn’t last and, like all bubbles, it didn’t.

Seeing the incredible growth, many people invested in start-up ventures of their own.

Most of these failed.

As they failed, people sold their South Sea Company stock to pay their debts.

As they sold, the share price dropped.

As the shares dropped, people who had borrowed to buy stock couldn’t repay the loans.

The shares began to plummet, then crash.

As usual when bubbles burst, most investors lost everything.

The debt was so huge it took 300 years to pay it off.

In 2015, Chancellor George Osborne repaid the final £218m.

That’s what happens with bubbles – no-one can ever see a time when they will stop growing.

Only "dinosaurs" worry about them.

The futurists, the trend spotters, don’t want to miss out, so they jump on the bandwagon.

Until the bubble pops and the wheels fall off the bandwagon.

AdContrarian recently quoted some marketing headlines from a year ago.

How the trend spotters saw marketing developing in the near future.

Martech: "Marketers Look To Climb Aboard ‘Pokémon Go’ Phenomenon."

Marketing Week: "Why ‘Pokémon Go’ Is A Game Changer For Marketers."

Wall Street Journal: "Ad Agencies Struggle To Form ‘Pokémon Go’ Strategies."

Remember Pokémon Go – whatever happened to that?

No good asking the trend spotters, they’re off spotting another trend.

Our business is full of people desperate not to miss out on the current bubble.

People saying that only dinosaurs are hesitant about jumping on board.

So ask yourself a question.

What’s the current bandwagon everyone is desperate to climb aboard without thinking?

Dave Trott is the author of Creative Mischief, Predatory Thinking and One Plus One Equals Three.

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