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What lessons can an investor learn from “The South Sea Bubble”?

Any investor planning to enter into the stock market, anywhere in the world, needs to look back in the past and analyse the details from the crisis known as The South Sea Bubble. In the year 1711 there was company in the United Kingdom, called the South Sea company which traded for £1,000 (which was not protected against inflation) and then were reduced to nothing by the later half of the year 1720. This resulted in to a heavy loss of money.

As far as this downfall is concerned, it is known that during the early 1700s the British Empire was at its peak and was controlling the entire globe. This empowered the South Sea Company (set up by the Brits) attract investors across the globe. The company bought the rights to trade, specifically, in South Seas. There were only a few companies at that time and most of them were offering stocks at a higher rate. Due to their dominance in the stock market, the owners of the company started issuing repeated stocks to the investors’ and nobody paid much attention to it. People were rather interested in buying the stocks, albeit the expensive lot. The investors didn’t even pay attention to the company’s management staff, not having experience in this domain. The company was being managed by public relations directors. People were rather interested in buying stocks from SSC as it was generating wealth, let alone it was more or less reflected.

Another company which took the same path as SSCs’ was the ‘Mississippi Company’ established in France. The company, which was basically designed by an exiled Brit named John Law, was aimed at switching the monetary system from gold or silver into paper currency system. This company created news and soon it had traders from different parts of the globe flowing in and putting their hard-earned money into the company. This massive investor flow placed the company in a much stronger position than its fellow companies in the same field.

The success of Mississippi Company was not taken well with the Brit investors investing in SSC and they took it to investing in SSC in larger numbers ignoring all the indications filling the stock market environment. SSC, on the other hand, was in a poor condition as it had lost a lot of wealth with the mishandling of the entire wool shipments which were left decaying in foreign ports. But they kept the investors in dark and kept on selling the stocks for the investors’ who flocked in to buy these stocks.

Very soon the management of SSC realized that they cannot keep up the promises made to their fellow investors and they don’t stand a chance to survive in this competitive environment and hence, they decided to sell their stocks. And this was the year 1720 that SSC sold its stocks and kept a low profile, hoping that the news will not spread and ruin their reputation. But as the saying goes, a bad news travels fast, the failure of SSC Company became public and investors’ realized that it is impertinent to sell their certificates as they are now worthless. As soon as SSC Company’s performance was revealed, the traders from South Seas also lost faith the Mississippi Company and thus, the stocks of the later company also came crashing down.

The basic idea behind sharing this story was to create an understanding for an investor, to only embark upon any opportunity when getting involved with stocks, is only after preparing oneself with the complete information about the company one opts to involve with. This is an important practice if an investor/ trader wants to avoid any imbroglio and future mishaps.