Niall Ferguson


Niall Ferguson

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Niall Ferguson is Professor of Political and Financial History at Oxford University and Visiting Professor of Economics at the Stern Business School, New York University.

Books

The Cash Nexus , Allen Lane, 2001

The House of Rothschild , Penguin 2000

Lessons from the Rothschilds

Introduction

When I began work on the history of the Rothschild family I was not myself an investor. Naturally, I hoped that studying the correspondence of the nineteenth century's richest dynasty would reveal to me the secret of their success and endow me with the Midas touch. I certainly learned a great deal in the bank's immense archives, but I remain unsure as to whether the rules by which the Rothschilds operated then have any validity today. Of course, members of the family still offer professional financial advice through a variety of firms bearing the Rothschild name . Anyone who seriously wants to know how to invest their money today should contact one of them. As an historian whose biggest investment is a seventeenth-century Oxfordshire farmhouse, all I can offer is past Rothschild advice, which may or may not be perennial.

There are at least two pieces of folklore about Rothschild investment strategy. One, often attributed to Nathaniel, the first Lord Rothschild, is that investment should be like a cold shower: 'Quick in, quick out'. This is the very opposite of today's 'Stocks for the Long Run'. But I doubt that was ever said, at least not in earnest.

Another apocryphal story is that the Rothschilds invested a third of their wealth in securities, a third in real estate and a third in objets d'art. That certainly was not the case: big though their houses were (and they were the biggest private residences built in the nineteenth century) and no matter how dazzling their collections of Old Masters, their immense securities portfolios were always worth a lot more.

So what did the Rothschilds really say about investment? As they were primarily though not exclusively bond- issuers and traders, much of what they wrote in their voluminous correspondence is relevant to investors in government securities, not equities.

  1. Look for governments in trouble.

    Mayer Amschel Rothschild, the founder of the bank, used to tell his sons: 'It is better to deal with a government in difficulties than with one that has luck on its side.' That sounds like another way of saying a government in real financial trouble will pay higher yields and commissions. (Note: That should not be read as a recommendation to buy Ukrainian government bonds today.)

  2. Spread the sugar . . .

    The Rothschilds were bond wholesalers as much as investors, so it is worth listening to what they had to say about trading. In 1836 James de Rothschild, Mayer Amschel's youngest son, gave his nephews some advice about how to sell securities on the Paris stock exchange:

    'When you are buying or selling rentes, try not to look at making a profit, but rather your aim should be to get the brokers used to the idea that they need to come to you . . . [O]ne initially has to make some sacrifices so that the people then get used to the idea to come to you, my dear nephews, and as such one first has to spread the sugar about in order to catch the birds later on.'

  3. . . . or spread the fear.

    But if sugar didn't work, James had an alternative strategy: 'If one can't make oneself loved then one has to make oneself feared,' he told his nephews, a rule he himself had been taught by his father.

  4. Insider dealing rules.

    The Rothschilds were of course able to act in ways that nowadays might invite allegations of 'insider dealing'. It was said of James's brother Nathan, for example, that 'If he possessed news calculated to make the funds rise, he would commission the broker who acted on his behalf [initially] to sell half a million.' Then, when the price had gone down and the rest of the market was looking the other way, Rothschild would buy in a big way. Only then would the 'news' break, driving up the price to new heights.

    Of course, this kind of activity was easier in the days before the telegraph (Bloomberg screens and CNBC were undreamt of). The Rothschilds' private couriers were generally first into town with any hot news from abroad. So the Rothschilds could easily steal a march on less well-informed investors. They were also adept at cultivating influential politicians , who had a habit of revealing their intentions to the Rothschilds in return for a cut of any ensuing speculation.

  5. Know when to hold back.

    The next generation lacked the hard-nosed ethos of their ghetto-born fathers. Nathan's son Nat was exceedingly risk averse, though his advice against investing in railways may strike a chord with those modern investors who were lured into the market for UK railway privatisation shares in the 1990s:

    'I am against [investment in railways] because I am afraid of the anxiety, bother & trouble which it will surely occasion us - the moral responsibility of it will rest entirely on us, & I wd sooner leave to others the profit which the shares are likely to bring than engage in a concern of such magnitude without the possibility of attending to it properly. I think the best thing is . . . not to have anything to do with them.'

  6. Sell too soon.

    As might be expected, the Rothschilds were frequently badgered for free investment tips. Asked if he had a formula for financial success, the first Lord Rothschild habitually replied, ' Yes, by selling too soon.'

  7. Don't go bust.

    The above caution had its disadvantages and helps explain why the Rothschilds - still in terms of capital the biggest bank in the world in 1905 - were overhauled by joint-stock banks in the twentieth century. When Sir Edward Guinness sought to float the famous brewing company on the stock market in 1886, the London Rothschilds refused to handle the & pound ;6 million flotation, which was snapped up by Barings and yielded the rival bankers a handsome profit. Yet when asked by a journalist if he regretted turning the business down, Lord Rothschild replied: 'I don't look at it quite that way. I go to the House every morning and when I say "No" to every scheme and enterprise submitted to me, I return home at night carefree and contented. But when I agree to any proposal, I am immediately filled with anxiety. To say "Yes" is like putting your finger in a machine: the whirring wheels may drag your whole body in after the finger.' Risk averse, yes - but then one of the secrets of success in banking is not to go bust.

  8. Be a rich man.

    Buy my favourite Rothschild story is an old German-Jewish joke: 'Herr Baron, Herr Baron,' asks the archetypal stock market hanger-on, 'What will the markets do tomorrow?' 'If I knew that,' replies Rothschild, 'I'd be a rich man.'

www.history.ox.ac.uk

'A major pitfall to any investment strategy is the discrete start of the investment program. If all funds are committed at the start of the program, the overall performance of the investment program will depend significantly on the specific entry point. Build up positions over time.'

”Richard Olsen



Global-Investor Book of Investing Rules(c) Invaluable Advice from 150 Master Investors
The Global-Investor Book of Investing Rules: Invaluable Advice from 150 Master Investors
ISBN: 0130094013
EAN: 2147483647
Year: 2005
Pages: 164

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