Fleeing Is Not Shameful, It Is the Wise Choice

Have you heard the phrase “the Mississippi Company”? It refers to one of the largest bubbles in history, which occurred in 18th-century France. I’ll leave the detailed explanation to specialist books, but here I’ll summarize it just enough to follow the point.

The French economy in the early 18th century was in decline, a consequence of the extravagant spending of the late Louis XIV. The regent (the de facto supreme ruler) worried about this, but he and the people around him were mediocre and couldn’t find any real solution. Into this stepped a Scotsman named John Law. He had a genius mind for mathematics but little sense of ethics, having made his fortune through gambling and been exiled from his homeland after killing a man over drink and women. Still, genius will out. Law succeeded brilliantly in ingratiating himself with the regent, and economic policy came to be conducted along the lines he recommended. His innate brilliance and the broad financial knowledge he had picked up while wandering foreign countries brought a dramatic if temporary recovery to the French economy, and Law made a fortune along with it.

It was around then that Law conceived the Mississippi plan. He drew up a plan to develop the gold mines around the Mississippi region, then French territory, and acquired control of the Mississippi Company.

Since it was the company of Law, the hero of the economic world at the time, the Mississippi Company’s stock price shot up. Law issued additional shares, but demand to buy stock was so overwhelming that currency itself ran short. So the regent issued additional banknotes, and the stock price rose again, prompting more issuance, and then again, and again — until the volume of currency in circulation ballooned to several times, even dozens of times, the size of the real economy. (This was still the age of the gold standard, and Law himself surely understood full well the risk of a bank run.)

During that period of frenzy, nobles and stockbrokers seeking rights to purchase new Mississippi Company shares rushed to Law and formed long lines. People even pitched tents nearby to get the latest information, to the point that Law was forced to move house repeatedly. Stock trading boomed, related businesses flourished, and Paris’s economy appeared, on the surface, to glitter. Workers’ wages rose several times over, and rents soared. But public order deteriorated, and even high-ranking nobles and clergy, desperate to obtain shares, turned to crime.

The unraveling began when a certain duke, in a fit of spite after failing to receive rights to new shares, sold off all his stock.

Gradually, brokers with sharp instincts, and the nobles they influenced, began to think, “There’s no way this can go on forever.” They sold off their shares little by little and moved their assets abroad. This caused domestic economic activity to stagnate even further, widened the gap with the real economy, triggered a shortage of coin and a loss of confidence in banknotes, and ultimately the plan collapsed. The stock price fell sharply as well. (Through all this, the Mississippi Company’s own business had achieved essentially nothing — it was, after all, a company that had been sold off cheap precisely because producing results had proven so difficult.)

Law fled the country while still burdened with enormous debts. The regent later testified in the subsequent trial in a way that placed nearly all the blame on Law, turning him into a villain for the history books, and the affair came to an end. But the turmoil in the French economy left deep scars, and further incidents claiming many lives would follow. (I’ll skip the details here since it strays from the theme.)

Hmm. It’s a slightly rearranged version of a story you’ve heard somewhere before.

Historical disasters, more often than not, closely resemble other historical disasters you’ve heard of somewhere before.

So what’s the lesson from a situation like this? What’s the ironclad rule? Simply put: run.

Surely there were people who watched this classic bubble unfold with a cool, detached eye. But a bubble like this runs its course to the very end before it bursts. Which means the damage spreads indiscriminately to everyone around it.

Take the Mississippi Company affair as an example: faced with a coin shortage, the regent first devalued the coinage several times, then followed this with limits on how much coin people could hold, and finally issued a decree banning the use of coin altogether. In other words, even the wealth of the wise people who had merely stood by watching was substantially eroded.

So in this case, the correct answer was “get your assets overseas and flee, fast.”

Of course, in a bubble of this kind there were surely plenty of people who made enormous profits and pulled off a clean escape. Even short of striking it rich, most of the French laborers sent to America as workers for the Mississippi Company during this period never once set foot in the gold mines — they simply vanished into other American states.

Standing by and watching isn’t enough. You have to avoid it entirely. The moment you spot a situation that’s clearly “off,” put as much distance between yourself and it as possible.

Running away isn’t even shameful. It’s the wisest course of action.

The internet bubble (the dot-com bubble) is something that happened long ago, in both America and Japan. Certain specific businesses became wildly popular during that period. One of them, I think, was “outsourced website creation.” Back when many companies still didn’t have a website, engineers who could nimbly type out HTML tags had value. Those who could write stylesheets had even more value. Anyone who could handle Perl was in high demand. Several companies earned very large profits during that period, but the people who came out clean winners were, without exception, those who correctly judged the peak and got out at the right time.

As you know, the work of writing HTML tags soon vanished from the market and became worthless. But since websites themselves remained, the market came to demand “added value.” That said, added value is a genuinely difficult thing, and not something anyone can easily conjure up. Customer needs also vary enormously. On top of that, the market itself was shrinking as prices fell.

Fighting over diverse needs within a shrinking market — that reeks of a death match. Those who sensed it skillfully got out fast. That, precisely, was the wise move.

Incidentally, the dot-com bubble is usually discussed in terms of the stock market, but doing so here would just duplicate what’s already been said about other episodes (foolish history repeats itself!), so I’ve deliberately avoided that angle.

Now what about the subprime mortgage crisis? Everyone involved in the securities market at the time was surely affected. So the correct answer there was to withdraw from the securities market. If you’d converted your assets into things with low volatility, like gold or real estate, you could have made a fortune buying up stocks after they’d fallen to rock bottom. (I didn’t.)

On a somewhat smaller scale, companies where “wrong practices” run rampant carry the same warning signs. If such a company is large, or happens to be popular, or enjoys a good external reputation, the fallout when things burst is correspondingly large. Wrong practices mean people with no track record getting promoted, employees with clearly problematic ethics — or their actions — being left unaddressed, and the mechanisms that should police such things failing to function properly. And it means a company filled with employees who never question any of it. Running from such a company is the correct move. It’s the wise course.

Still, timing is always the hard part in these situations.

Even with the Mississippi Company, there must have been shrewd people who made some profit and then got out. The same is true of the internet bubble, and even of the subprime crisis (that was the era when the pay of “star traders” on Wall Street became limitless).

You want to win nicely, then escape nicely.

Unfortunately, very few people in this world manage that. It’s not something ordinary people do.

Ordinary people, once they’re in profit, tend to think “I can probably squeeze out a bit more,” and even once things start falling, they tend to think “surely it’ll bounce right back” (cognitive bias). Those who can make a coldly correct judgment in that moment walk away with a solid profit. But ordinarily, it’s not that simple.

Indeed, in the Mississippi affair, the regent at a certain point banned taking assets out of the country and also banned exchanging banknotes for precious metals. Checkmate. How many people, one wonders, actually read that timing correctly? Most of those who came out ahead simply fled, fast and with everything they had, the moment they personally felt “this is bad.” That was it. This is an extremely risky, razor’s-edge move.

The same can be said of the South Sea Bubble, which occurred in England at almost the same time as the Mississippi affair. This was an incident in which the stock market, overheated by the South Sea Company — a copycat enterprise running almost the same fraudulent scheme as the Mississippi Company — gave rise to a flood of “bubble companies” (companies with almost no real business that raised huge sums by promising large dividends, only to vanish before long), springing up like weeds and bringing great turmoil to the stock market. Of that period it’s been recalled that “most gentlemen and ladies never believed those dubious companies’ businesses would succeed, and were thinking only of which fool they could unload their shares onto at the highest possible price the next time the stock rose” — a chicken game risky enough to earn that kind of description. (Apparently there was even “a company selling mail-order perpetual motion machines,” so if that isn’t madness, what is?)

A more recent example would be the excessive proliferation of altcoins (let’s call them the motley crowd of non-mainstream cryptocurrencies) from late 2017 into early 2018, which could be called a similar case. There were surely people who skillfully sold out and profited there, but correctly reading the timing of a rise and fall in something that trades at $0.01 one day and hits several hundred dollars the next can only be called a superhuman feat (well, or most of it was probably manipulation by market riggers).

Ah, if I write about ICO scams too this will get long again, so I’ll pass on that here.

Doing this kind of thing risks throwing away precious money down the drain — or, if you’re running your own business, your time. So for ordinary people, the correct answer is simply “don’t get on board in the first place.” Don’t be greedy. Most bubbles are already close to their peak by the time many people start thinking, “hey, maybe this could actually work…” Without exceptional foresight or sheer luck, it’s almost impossible to catch a big wave from the start. And the profit you can extract from a wave that’s already underway is, in any case, negligible. So rather than reaching for unreasonable gains, better to get some distance, fast.

In exactly this kind of case, running away isn’t even shameful — it must be the wisest move. When you spot something “off” right in front of you, I strongly recommend moving to act swiftly and boldly, no matter what. This, I think, can fairly be called the truth of the matter.

Originally published in Japanese at https://clazytech.com/2020/02/328/. Translated with LLM assistance and reviewed before publication.