Fleeing Is Not Shameful But Wise

Have you heard the phrase “the Mississippi Scheme”?

It refers to one of the largest bubbles in history, which took place in 18th-century France.

I’ll leave the detailed explanation to specialist books. Here I’ll just summarize it briefly enough to follow the argument.

The French economy at the start of the 18th century was in decline, thanks to the extravagance of the late Louis XIV.

The regent who worried about this (the effective supreme power at the time) and the people around him were mediocre, and no real solution had been found.

Into this stepped a Scotsman named John Law. He had a brilliant mind for mathematics but was lacking in ethics, having built a fortune through gambling. After a scandal involving drink and women that ended with him killing a man, he was driven out of his homeland.

But genius will out. Law succeeded brilliantly in ingratiating himself with the regent, and economic policy came to be conducted along the lines Law proposed. Drawing on both his innate intelligence and the broad financial knowledge he’d picked up wandering various countries, Law engineered a dramatic recovery in the French economy for a time, and made a fortune along with it.

It was around this time that Law conceived the Mississippi Scheme.

He drew up a plan to develop the gold mines around Mississippi, then French territory, and acquired control of the Mississippi Company.

Since it was the company of Law, who was by then the hero of the economic world, the Mississippi Company’s share price shot up. Law issued additional shares, but demand to buy shares was so overwhelming that currency itself fell short.

So the regent issued additional banknotes, which pushed the share price up further, prompting yet more issuance, and again, and again. The volume of currency in circulation ballooned to several times, then dozens of times, the size of the real economy. (This was still an era of the gold standard, and Law himself surely understood full well the risk of a bank run.)

During that frenzied period, nobles and stockbrokers seeking rights to purchase new Mississippi Company shares rushed to Law’s residence and formed long lines. People pitched tents nearby trying to get the latest information, to the point that Law was forced to move house repeatedly.

Trading in the shares became a frenzy, business activity around it was energized, and Paris’s economy appeared, on the surface, to flourish. Workers’ wages rose several times over, and rents soared. But public order deteriorated, and even high-ranking nobles and clergy, eager to acquire shares, turned to criminal acts.

Then the cracks began when a certain duke, in spite at not being granted rights to new shares, sold off all his holdings.

Gradually, brokers with sharp instincts, and the nobles they prompted, 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 slump further, widened the gap with the real economy, and triggered a shortage of coin and a collapse of confidence in paper money. The scheme ultimately collapsed, and share prices fell sharply along with it. (Notably, the Mississippi Company’s actual business had achieved essentially nothing throughout this period, which makes sense, since it had been sold off cheaply in the first place precisely because producing results was so difficult.)

Law fled the country carrying enormous debts.

The regent later testified at trial in a way that pinned nearly all responsibility on Law, creating a great 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 followed. (Since this would take us off topic, I won’t go into detail here.)

Hmm. This sounds like a slight variation on a story you’ve heard somewhere before.

Historical disasters mostly resemble other historical disasters you’ve heard of somewhere before.

So what’s the lesson in a situation like this? What’s the iron rule?

Simply put: run away.

Surely there were people who watched this classic, textbook bubble with a cold eye.

But this kind of bubble runs its course to the very end before it bursts.

Which means the damage spreads indiscriminately to everyone nearby.

Take the Mississippi Scheme as an example: facing a coin shortage, the regent first carried out several devaluations of coinage during that period, then followed 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 assets of the prudent people who had simply been watching from the sidelines shrank drastically.

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

Of course, in a bubble like this, there surely were plenty of people who made enormous profits and made a clean escape.

And even short of striking it rich, many of the French laborers sent to America as Mississippi Company workers during this period never once set foot in the gold mines and simply vanished into other American states.

Watching in silence is not enough. You must avoid it. The moment you spot a situation that’s clearly “off,” put as much distance as you can between yourself and it.

Running away isn’t even shameful. It’s the better strategy.

The internet bubble (the dot-com bubble) is a thing of the distant past now, in both America and Japan.

During that period, a few specific businesses became wildly popular. One of them, as I recall, was something like “website creation on commission.”

Back when many companies still didn’t have websites, engineers who could rattle off HTML tags with ease had value. If you could write style sheets, you had even more value. If you could handle Perl, companies fought over you.

Several companies achieved enormous profits during that period, but the people who truly came out winners were the ones who correctly identified the peak and got out at the right moment.

As you know, the work of writing HTML tags soon disappeared from the market and became worthless.

But since websites themselves remained, the market came to demand “added value” instead.

That said, added value is a genuinely difficult thing, not something anyone can easily conjure up. Customer needs also vary enormously. On top of that, the market itself has been shrinking due to falling prices.

Competing over the diverse needs within a shrinking market reeks of a death game. Those who sensed this skillfully got out fast. That truly was the better strategy.

People naturally discuss the dot-com bubble most often in terms of the stock market, but doing so here would just repeat the same story as the other incidents (foolish history repeats itself!), so I’ve deliberately avoided that angle.

Now, what about subprime loans?

Surely everyone involved in the securities market at the time was affected.

So the correct answer there was to withdraw from the securities market.

If you had converted your assets into things with low volatility, like gold or real estate, you probably could have made a killing by buying up stocks cheaply once they had fallen all the way. (I didn’t do this.)

On a somewhat smaller scale, companies where “bad practices” run rampant carry the same kind of warning signs.

If such a company is a large one, or one with genuine popularity or a good public reputation, the scope of the damage once it bursts is enormous.

Bad practices mean things like people with no track record getting promoted, employees with clearly problematic ethics, or their actions, being left unaddressed, and the mechanisms meant to police these things not functioning properly. And a situation where the company is filled with employees who never question any of it.

The right move is to get away from a company like that. It’s the better strategy.

That said, timing is always the hard part in these situations.

There surely were some skilled people who made a decent profit from the Mississippi Scheme before getting out.

The same goes for the internet bubble, and even for subprime loans (this was also when “star traders” on Wall Street saw their pay hit no ceiling at all).

Everyone wants to win nicely and then get out nicely.

Unfortunately, few people in this world manage to pull that off. They aren’t ordinary people.

Ordinary people tend to think, once they’re in profit, “I can probably make a bit more,” and even once things start declining, they tend to think, “surely it’ll bounce back soon” (a cognitive bias). Anyone who can make a coldly correct judgment here reaps a proper profit. But usually, it’s not that simple.

In fact, in the Mississippi Scheme, the regent at a certain point banned taking assets abroad, and also banned exchanging paper money for precious metals. Checkmate.

How many people, really, could have read that timing correctly?

Most of the people who came out ahead simply fled swiftly and with full commitment the instant they personally felt “this is bad.” That was all there was to it.

This is an extremely risky tightrope to walk.

The same can be said of the “South Sea Bubble,” which occurred in England at almost the same time as the Mississippi Scheme.

The South Sea Company was a copycat enterprise running almost the same fraudulent scheme as the Mississippi Company, and it drove the stock market into an overheated frenzy. In its wake, countless “bubble companies” (companies with essentially no real business, which raised huge sums by promising big dividends, only to vanish before long) sprang up like mushrooms after rain, throwing the stock market into great confusion. Even then, it’s said:

“Most gentlemen and ladies never believed those shady companies’ businesses would succeed; they were only thinking about which fool they could unload their shares onto at the highest possible price the next time the stock rose.”

It was a game of chicken risky enough to be remembered that way.

(There was apparently even “a company selling perpetual motion machines by mail order” among them, so what could this be if not sheer madness?)

A more recent example, and one still fresh in memory, is the excessive proliferation of altcoins — the miscellaneous non-mainstream branch of cryptocurrency — from late 2017 through early 2018, which we could call a similar case.

There were surely people who skillfully cashed out and profited there, but correctly reading the timing to buy and sell something that could trade at $0.01 today and hundreds of dollars tomorrow is nothing short of superhuman (well, or maybe most of it was manipulation by market operators anyway).

Ah, writing about ICO fraud would make this even longer, so I’ll pass on that here.

Doing something like this risks throwing precious money, or, if you’re running your own business, time, down the drain.

So for ordinary people, the correct answer is “simply don’t get on board in the first place.” Don’t be greedy.

With most bubbles, by the time a lot of people start thinking “maybe this could actually work…,” it’s already close to the peak. Without exceptional foresight or sheer luck, almost no one gets to ride the big wave from its early stages.

And the profit you can extract from a wave that’s already underway is quite limited. So it’s better to give up on unreasonable greed and get some distance, fast.

In exactly this kind of situation, running away isn’t even shameful — it’s the better strategy.

The moment you spot an “off” situation right in front of you, I strongly recommend moving to act quickly and boldly, no matter what.

I think it’s fair to call this a truth.

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