Most of the information below is sourced from the book ‘Boom and Bust: A Global History of Financial Bubbles’ by David John Turner and William Quinn. Highly recommended.
Latin American Mining Stock Bubble 1825 - 1826
A growth in surplus savings in the UK after the Napoleonic Wars left UK investors flush with cash and looking for places to invest. Around the same time, many Latin American countries were enjoying their recently declared independence from Spain or Portugal and were in search of funding.
The first Latin American loans were provided in 1822 to Colombia, Chile, Peru and the mythical country of Poyais. If you haven’t heard of Poyais that’s because it was completely made up by Gregor MacGregor and was a total fraud.
The first Latin American mine was listed on a UK stock exchange a couple years later in July 1824 and over the next 18 months prospectuses were issued for 74 Latin American mining companies. Other ancillary businesses in the region took advantage of UK investors’ eagerness to invest and in total 624 new Latin American companies were promoted in 1824 and 1825.
These new ventures raised money on overly optimistic expectations for Latin America with most business models based on the assumption that the "intellectually superior British could exploit profit opportunities currently being missed by primitive locals."
Captain Francis Head was in Argentina at the time and described the experience of the Churning Company, one of many companies (and investor bases) who failed to adequately conduct their market research. The Churning Company had ambitiously set off to provide butter to the people of Buenos Aires:
"The difficulties with which the [milk maids brought from Europe] experienced were great: instead of leaning their heads against patient domestic animals, they were introduced to a set of lawless wild creatures, who looked so fierce that no young woman who ever sat upon a three-legged stool could dare to approach, much less to milk them! But the Gauchos attacked the cows, tied their legs with strips of hide, and as soon as they became quiet, the shops of Buenos Aires were literally full of butter.
But now for the sad moral of the story: after the difficulties had been all conquered, it was discovered, first, that the butter would not keep! – and secondly, that, somehow or other, the Gauchos and natives of Buenos Aires liked oil better!"
All of these flashy new Latin American ventures soaked up the majority of investors’ attention and capital, evidenced by a 5x rise in an index of Latin American mining companies from August 1824 to February 1825, and a 2.7x rise in a group of ancillary Latin American companies. Over this same time frame an index of UK blue-chip stocks representing the broader market was slightly down:
The bubble began to burst in part when government officials started going after some of the new ventures which they deemed "unincorporated companies" i.e. those companies which had not been authorized by the Crown or Parliament. This fear of increased regulation, along with stories like that of the Churning Company, caused a panic and the prices of foreign mining stocks fell by 50% by the end of April.
Similarities to the Today
Retail Investors Defend the Bubble
The attempts by the government to burst the bubble produced a stream of opposition from the retail traders. One of the pamphleteers, a 21-year-old solicitor’s clerk named Benjamin Disraeli, made a concerted effort to talk up [read: pump] the Latin American mining stocks and wrote multiple pamphlets to refute what he saw as an “erroneous parallel” being drawn between the Latin American boom and the South Sea Bubble 100 years prior.
In other words, you had a retail investor incessantly posting about the virtues of the bubble stocks and claiming “this time is different”, not too dissimilar to what you may see today on Reddit or Twitter around any number of EV companies, meme stocks, crypto, etc.
Expectations proved to be wildly optimistic
The abysmal reality of these Latin American ventures eventually made its way back to London and it became clear that the market was nowhere near as promising as anticipated. Shareholders refused to pay their calls on part paid shares as reality hit them and began to dump their stocks in a rush to the exit. By the end of 1826, the number of listed Latin American mining stocks, which had numbered 511 in February 1825, fell to just 27. Even those that did manage to survive produced little return for investors.
Is there a chance some popular groups of stocks today may struggle to live up to lofty expectations? Software companies pricing in 30% annual sales growth for 30 years? Companies with projected $5 trillion TAMs? Pre-deal SPACs trading at 200%+ premiums?
The Media's Role
In the 1820s, UK newspapers began to publish daily articles on the stock market for the first time which served to magnify the boom psychology and help inflate the bubble. Readers were bombarded daily with the "investment possibilities and fabled precious metals of Mexico", some journalists were even paid to pump new offerings. Over one 2-day period in January 1825, The Times and Morning Chronicle alone published the prospectuses of 35 new Latin American companies looking to raise money.
Today you have certain SPAC sponsors and Cathie Wood making regular appearances on CNBC seemingly daily to pump their stocks to retail investors.
As the story goes, one young speculator in London reportedly had only £52 to his name in 1824 but borrowed heavily to speculate in the mining stocks and by spring of 1825 he had made a small fortune holding shares in all the big mining companies. You could say he had the original diamond hands. However, a couple months later he lost it all as the bubble popped and supposedly his stockbroker was still trying to collect £1,200 plus interest from him 24 years later.
I suspect we’ll only hear more stories of Robinhood traders who get caught up in meme stocks only to overly extend themselves and lose their savings and then some.
Similar to the South Sea bubble there was widespread use of part-paid shares by new companies. This effectively equated to leverage and let speculators make large profits off moderate share price moves because only a small installment of £5 or less was required upfront.
"This possibility of making an enormous profit while only risking a small sum was a bait too tempting to be resisted, and opened up share speculation to the masses."
Similar easy access to leverage is offered today on certain apps and even almost pushed on retail investors.
Market Manipulation to Burn Short Sellers
"Short selling was a well-known practice on the London Stock Exchange in the 1820s, but its usefulness in preventing the escalation of stock prices during the bubble was stymied by the presence of corners and rigs.. Short selling was viewed as morally suspect and financial markets were happy for this market manipulation to be used to thwart the pessimistic and opportunistic short sellers."
Today we have Robinhood traders, Congress members and billionaire CEOs alike denouncing short selling and clamoring for its outright ban.
Low Nominal Share Prices and "Zero Commission Trading"
The marketability of shares in the 1820s increased substantially due to the new ‘free transferability of shares’. Shares of these new companies also began to be issued in much smaller denominations making them more accessible to the average person. The average cost of one share in a canal company in 1825 was £271 compared to £10 on average for one of the new Latin American companies. This increased marketability of securities resulted in a record setting level of liquidity in the stock market in 1825 that would not be surpassed until the next bubble arrived in 1844, 19 years later.
Two new developments in late 2019 helped spark the current retail trading euphoria - zero commission trading and fractional shares. Both of these lowered the barrier to entry for many retail traders, same as in 1825, and pulled millions into the market.
Money Printing by the Government
The Bank of England increased the money supply by 25% in the 3 years leading up to the bubble from 1822 - 1825 while the English country banks increased the amount of notes even more, by around 50% between 1823 and 1825.
"The combined effect of easy monetary policy and loose credit was exacerbated by the increased leverage available to investors through the unpaid capital form of buying new shares. This double dose of leverage meant that individuals with small sums of money access to the stock market."
The Fed has similarly ramped up its money printing machine since COVID with 37% of M1 money stock created in 2020 alone.
By late 1925 , several banks in England collapsed and there was a series of bank runs followed by more bank failures. In total, 66 English banks went bankrupt from December 1825 - April 1826 equating to ~18% of the English banking system.
“..in 1826 the United Kingdom’s real GDP contracted by 5.3%. To put this into perspective, between 1800 and 2010, only 3 years experienced a larger fall in GDP than 1826.
The damage was not restricted to the United Kingdom, the bubble also left a negative mark on Latin America. It would be nearly 50 years before British investors would once again take an interest in Latin American ventures."
In summary, there’s nothing new under the sun. Technology changes, markets shift, economies evolve, but human nature and psychology remain the same.
At Voss we make it a priority to study history and attempt to learn from it to avoid making mistakes made by plenty before us.
This post is typically something we would circulate internally amongst the team but from now on we’ll begin posting similar studies of history, thematic research, investment memos and book summaries here on Substack.