The Web Site of Victor Niederhoffer & Laurel Kenner
Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter; a forum for us to use our meager abilities to make the world of specinvestments a better place.
Write to us at: (address is not clickable)
Ahoy There, Speculators!
The series of historical novels by Patrick O’Brian recounting the exploits of British Navy captain Jack Aubrey and his friend, intelligence agent Stephen Maturin, hold places of honor in our speculative libraries. While we ourselves are not nautically inclined, we find the maritime details to be the backdrop for a tapestry of adventure, science and human relations as rich as life. The Maturin character, based on Charles Darwin, provides a delightful portrait of a 19th-century scientist’s passionate interest in the natural wonders of the far corners of the world. O’Brian’s insights into business and markets often carry great interest for traders. We reproduce a few passages below.
Read Vic's review of the film "Master and Commander"
Read an explication of the weather gage by Jack Tierney, president of the Old Speculators' Association.
H.M.S. Surprise, Chapter 1:
“But I put it to you, my lord, that prize-money is of essential importance to the Navy. The possibility, however remote, of making a fortune by some brilliant stroke is an unparalleled spur to the diligence, the activity, and the unremitting attention of every man afloat. I am sure that the serving members of the Board will support me in this,” he said, glancing round the table. Several of the uniformed figures looked up, and there was a murmur of agreement: it was not universal, however; some of the civilians had a stuffed and non-committal air, and one or two of the sailors remained staring at the sheets of blotting-paper laid out before them. It was difficult to catch the sense of the meeting; if indeed any distinct current had yet established itself: this was not the usual restricted session of the Lords Commissioners of the Admiralty, but the first omnium gatherum of the new administration, the first since Lord Melville’s departure, with several new members, many heads of department and representatives of other boards; they were feeling their way, behaving with politic restraint, holding their fire. It was difficult to sense the atmosphere, but although he knew he did not have the meeting entirely with him, yet he felt no decided opposition—a wavering, rather—and he hoped that by the force of his own conviction he might still carry his point against the tepid unwillingness of the First Lord. “One or two striking examples of this kind, in the course of a long-protracted war, are enough to stimulate the zeal of the whole fleet throughout years and years of hardship at sea; whereas a denial, on the other hand, must necessarily have a—most unnecessarily have the contrary effect.” Sir Joseph was a capable, experienced chief of naval intelligence; but he was no orator, particularly before such a large audience; he had not struck upon the golden phrase; the right words had escaped him, and he was conscious of a certain negative, unpersuaded quality in the air.
“I cannot feel that Sir Joseph is quite right in attributing such interested motives to the officers of our service,” remarked Admiral Harte, bending his head obsequiously toward the First Lord. The other service members glanced quickly at him and at one another: Harte was the most eager pursuer of the main chance in the Navy, the most ardent snapper-up of anything that was going, from a Dutch herring-buss to a Breton fishing-boat.”
“I am bound by precedent,” said the First Lord, turning a vast glabrous expressionless face from Harte to Sir Joseph. “My legal advisers tell me that this is the appropriate decision. We are bound by Admiralty law: if the prize was made before the declaration of war that proceeds escheat to the Crown. They are droits of the Crown.”
“The strict letter of the law is one thing, my lord, and equity is another. The law is something of which sailors know nothing, but there is no body of men more tenacious of custom nor more alive to equity and natural justice. The position, as I see it, and as they will see it, is this: their Lordships, fully aware of the Spaniards’ intention of entering the war, of joining Bonaparte, took time by the forelock. To carry on a war with any effect, Spain needed the treasure shipped from the River Plate; their Lordships therefore ordered it to be intercepted. It was essential to act without the loss of a moment, and the disposition of the Channel Fleet was such that—in short, all we were able to send was a squadron consisting of the frigates Indefatigable, Medusa, Amphion and Lively; and they had orders to detain the superior Spanish force and to carry it into Plymouth. By remarkable exertions, and, I may say, by the help of a remarkable stroke of intelligence, for which I claim no credit, the squadron reached Cape Santa Maria in time, engaged the Spaniards, sank one and took the others after a determined action, not without grievous loss on our side. They carried out their orders; they deprived the enemy of the sinews of war; and they brought home five million pieces of eight. If now they are to be told that these dollars, these pieces of eight, are, contrary to the custom of the service, to be regarded not as prize-money at all but as droits of the Crown, why then, it will have a most deplorable effect throughout the fleet.”
“But since the action took place before the declaration of war …” began a civilian.
“What about Belle Poule in 78?” cried Admiral Parr.
“The officers and men of our squadron had nothing to do with any declaration,” said Sir Joseph. “They were not to meddle with affairs of state, but to execute the orders of the Board. They were fired upon first; then they carried out their duty according to their instructions, at no small cost to themselves and with very great advantage to the country. And if they are to be deprived of their customary reward, if, I say, the Board, under whose orders they acted, is to appropriate this money, then the particular effect upon the officers concerned, who have been led to believe themselves beyond the reach of want, or of anything resembling want, and who have no doubt committed themselves upon this understanding, will be--”
“Lamentable,” said a rear-admiral of the Blue.
Comment from Vic:
The above passage, one of the best beginnings in literature, shows deep insight into meetings, law, economics, naval custom, human psychology and the tendency for the beggar on horseback to gallop. It is highly recommended for all speculators and other businessmen as a fine example of the importance of the demonstration effect. The effect is used in economics to explain why the examples of rich nations and high consumption can act as a spur to the poorer. Great exertion can lead to great reward.
To what extent is a demonstration effect useful in investments? Does the example of a great acquisition in a field spill over to other companies? How about a great earnings report, a great surge in one stock, a great technological development? On the bad side, do investigations and poor economic reports also spill over? Is there anything going on here above and beyond the revised choice that must be made when the opportunity costs change, and the revised probabilities of subsequent events when more information comes into play support one hypothesis or another? Or are there psychological biases related to flaws in rationality?
H.M.S. Surprise, Chapter 4:
“I will not pretend that the loss of a fortune can be a matter of indifference to any man,” said Stephen to Sir Joseph. “I do not feel any emotion at all other than petty vexation at the moment, though no doubt I shall in time. But the interest to which you so obligingly refer is another matter: allow me to make it clear. I particularly wished to serve my friend Aubrey. His agent absconded with all his prize-money; the court of appeal reversed the condemnation of two neutral vessels, leaving him 11,000 pounds in debt. This happened when he was on the point of becoming engaged to a most amiable young woman. They are deeply attached to one another; but since her mother, a widow with considerable property under her own control, is a deeply stupid, griping, illiberal, avid, tenacious, pinchfist lickpenny, a sordid lickpenny and a shrew, there is no hope of marriage without his estate is cleared and he can make some kind of settlement upon her.”
“It appears to me,” said Stephen, speaking with Sir Joseph, “that these coups can be brought off only by enormous pains, forethought, preparation, or by taking them on the volley; and for that a very particular quality is required, a virtue I hardly know how to name. Baraka, say the Moors. Jack Aubrey possesses it in high degree; and what would be criminal temerity in another man is right conduct in him. Yet I left him in a sponging-house at Portsmouth.”
“Yes. His virtue seems to apply only at sea; or in his maritime character. He was arrested for debt at the instance of a coven of attorneys. Fanshaw, his agent, tells me it was for a sum of seven hundred pounds. Captain Aubrey was aware that the Spanish treasure was not to be regarded as prize, but he had no notion that the news had spread in England; nor, I must confess, had I, since there has been no official announcement. … I fear his other creditors may get wind of his renewed difficulties and so load him with processes that he will be hopelessly involved. My means do not allow me to extricate him; and although the ex gratia payment you were kind enough to mention may eventually extinguish the greater part of his debt, it will leave a considerable sum. And a man may rot in prison as thoroughly for a few hundred as for ten thousand pounds.”
“Has it not been paid?”
“No, sir. And I detect a certain reluctance in Fanshaw to make an advance upon it—these things are so unusual, says he, the event dubious, the delay unknown, and his capital was very much engaged.”
“…But will not his marriage set him up? I saw the announcement in The Times, and surely I understand the young lady to be a very considerable heiress?”
“That is so. But it is in her mother’s hands entirely; and this mother is the most unromantic beast that ever urged its squat thick bulk across the face of the protesting earth; whereas Jack is not. He has the strangest notions of what constitutes a scrub, and the greatest contempt for a fortune hunter. A romantic creature. And the most pitiful liar you can imagine; when I had to tell him the Spanish treasure was not prize, but that he was a pauper again, he feigned to have known it a great while—laughed, comforted me as tender as a woman, said he had been quite resigned to it these months past, desired me not to fret—he did not mind it. But I know all that night he wrote to Sophia, and I am morally certain he released her from her engagement. Not that that will have the slightest effect upon her, the honey bun,” he added, leaning back on his pillows with a smile.
H.M.S. Surprise, Chapter 8:
“Ah,” cried Jack, “if I had a guinea for every hour I have spent up here, I should not be worrying about prizes; or discounting bills on my next quarter’s pay. I should have been married long ago.”
“This question of money preoccupies your mind,” answered Stephen. “Mine, too, at times: how pleasant it would be, to be able to offer one’s friend a rope of pearls! And then again, such deeply stupid men are able to come by wealth, often by no exertion, by no handling or even possession of merchandise, but merely by writing figures in a book. My Parsee, for examples, assured me that if only he had the hard word about Linois’s whereabouts, he and his associates would make ‘lack upon lack of rupees.””
“How would he do that?”
“By a variety of speculations, particularly upon rice. Bombay cannot feed itself, and with Linois off Mahe, for instance, no rice ships would sail. Clearly the price would rise enormously, and the thousands of tons in the Parsee’s nominal possession would sell for a very much greater sum. Then there are the funds, or their Indian equivalent, which lie far beyond my understanding. Even an untrue word, intelligently spread and based upon the statement of an honest man, would answer, I collect: it is called rigging the market.”
H.M.S. Surprise, Chapter 9
”Just you look ahead of the commodore to the leading ship, Ganges, if I don’t mistake, and now cast your eye to old slowbelly in the rear, setting his topgallants and sagging to leeward something cruel. Look hard, now, because you will not likely see such a sight again; for there you have a clear six millions of money, not counting the officers; private ventures. Six million of money: God love us, what a prize!”
The officers who were wafting this enormous treasure across the ocean in their leisurely East-India fashion were well rewarded for doing so; this pleased them, because, among other things, it allowed them to be magnificently hospitable; and they were the most hospitable souls afloat.”
H.M.S. Surprise, Chapter 9:
“War is nine parts boredom, and we grow used to it in the service. But the last hour makes up for all, believe me.”
The Surgeon’s Mate, Chapter 4:
“As you see, a successful sortie by the French would leave Wellington hanging in the air, and completely change the face of the war; even as it is we have continual complaints from him about naval protection and supplies. No, no,” said Sir Joseph, “I do assure you, Maturin, the war is in its most dangerous stage. We are at our last throw; we have no reserves left; and if Napoleon achieves a victory by land or sea I doubt we can ever recover it. You have been away a great while and perhaps you cannot fully appreciate the immense decline in this country’s resources since you left. Taxes are as high as they can possibly be, perhaps even higher, and yet the money does not come in; we can scarcely fit out the fleet. Government’s credit is very low. You could paper your room with Treasury bills, the discount on them is so shockingly great. Trade is almost at a standstill; gold is not to be had—paper money everywhere—and the City is deeply depressed. The City is morose, Maturin, Morose!
"I do not suppose,” Sir Joseph said, “there are many things that men think about with such deep, careful, zealous attention as money, and the Stock Exchange is an infallible index of their thoughts, the collective thoughts of a large number of intelligent, informed men who have a great deal to lose and win. Even this Heaven-sent victory of yours, and Wellington’s at Vitoria, have scarcely moved the City to anything more than bonfires and illuminations and patriotic addresses. These gentlemen know that we cannot go on alone much longer, and at the first stroke of ill-fortune our allies will desert us, as they have so often deserted us before. No, sir: if I were half as sanguine about Napoleon’s downfall as you, I should go down into the City tomorrow and make my fortune.”
"How would you do that, for all love?”
"Why, I should buy Government stock, India stock, and any sound commercial shares whose value depends on foreign trade: I should buy them at their present dirt-cheap rate, and then as soon as Buonaparte was knocked on the head, or peace was declared, I should sell them at a perfectly enormous profit. Perfectly enormous, my dear sir. Any man with foreknowledge could do the same: any man who could command a considerable sum, or whose credit was good for a considerable sum, could make his fortune. It would be much like betting on a horse race if you knew the winner in advance. That is how fortunes are made on the Stock Exchange; although I must confess that the issues concerned are rarely so great.”
"You astonish me,” said Stephen. “I know nothing of these things.”
* * *
“I have a friend, a sea-officer, who was on shore for a while between commands and who succeeded in getting himself into very deep waters there. During a prolonged absence the water grew deeper still, and now I am very much afraid that it may close over his head, unless expert legal advice can extricate him. May I therefore beg you to tell me the name of the most eminent lawyer now in practice?”
"Would you be prepared to let me know the nature of your friend’s trouble?”
“I will lay the case before you, as far as I understand it. My friend fell into the hands of a projector, a man more modest than the usual run, since he promised to turn my friend’s lead not into gold but only into silver—there are disused lead-mines on my friend’s estate. He was delighted with the scheme, delighted with the man, and in his simplicity he signed papers without reading them.”
“Signed papers without reading them?” cried Sir Joseph.
“I am afraid so. He had been appointed to a ship. It seems that he did not wish to lose the tide.”
* * *
“Good God! Yet really I should not be surprised: the imbecility of your sailor ashore passes all belief. I have seen countless examples of it, in all ranks, even in very able men, capable of leading a fleet and of conducting difficult diplomatic negotiations with real finesse. Only last wee a distinguished officer I know assigned his half-pay for a lump sum: with this sum in his pocket in the form of negotiable bills he walks into a coffee-house. There he falls into conversation with a stranger: the stranger proposes an infallible scheme for multiplying capital by seven and a quarter without the slightest risk: the officer hands over his bills, and only when the stranger has been gone for some time does he realize that he does not even know the fellow’s name, far less his dwelling-place. But to return to your unhappy friend: has he any clear notion of the import of these papers?”
“He fears that one may have been a power of attorney: though on the other hand he had already given his wife just such a document. But at all events, on his return he found that the projector, the thaumaturge, had plunged into wild expense, carrying out vast operations, even digging the traditional canal.”
“Yes, yes, of course, the canal,” said Sir Joseph, and Stephen, seeing the knowing look in his eye, said, “It would be idle to pretend that I am not speaking of Jack Aubrey. I dare say you have seen the monstrous ditch in Hampshire?”
“I have, indeed,” said Sir Joseph. “It has caused a deal of comment.”
“And that is not all. This reptile Kimber, for Kimber is the projector’s name, now conceals himself behind a cloud of confederates, or rather of accomplices, to whom he has conveyed his ambiguous powers. Some of them are lawyers of the vilest kind, and they threaten proceedings. “
The Surgeon’s Mate
“You young fellows may prate about your cares,” said the Admiral, “but what would you say if you had a squadron on your hands? … “No, no; you are very well as you are, going quietly about your concerns, gathering all the glory and most of the prize money.”
Their respect for the Admiral was such that at any other time this might have passed, but now there was a general atmosphere of holiday and relaxation and cheerfulness, and the Admiral’s good wine had been going round and round; passionate dissent broke out—there was no prize-money in the Baltic, and by the infamous new regulation that nothing was most scandalously divided—the captains had lost a whole eighth—and that eighth was most absurdly minced up and given to people who only played ducks and drakes with it, their share being so small, while the captains were reduced to abject poverty.
“Never mind, gentlemen,” said the Admiral, “there is still glory to be picked up in the Baltic—look at Aubrey here, as far as you can see him for his fresh laurels—and in any case who cares about filthy lucre?”
Some of the captains looked as though they cared very much indeed, and one even observed “non olet” in an undertone; but when the Admiral called down the table to his flag-lieutenant, desiring him to “tip us Heart of Oak,” they listened to the young man’s pure tenor with great approval as he sang, “Come cheer up my lads, ‘tis to glory we steer,” and they joined in the chorus:
Heart of oak are our ships,
Heart of oak are our men,
We always are ready,
Steady, boys, steady...
The Reverse of the Medal, Chapter 1:
“Perhaps you have some newspapers,” said Jack, “that will give me an idea of how things stand in the world; for obviously you are much too busy with this damned court-martial to tell me the history of the last few months.”
“Not at all, not at all,” said Mr. Stone. ‘It will take me no time to tell you that things are going from bad to worse. Buonaparte is building ships in every dockyard, faster than ever; and faster than ever ours are wearing out, with perpetual blockade and perpetually keeping the sea. He has very good intelligence and he foments discord among the allies—not that they need much encouragement to hate and distrust one another, but it is wonderful how he touches on the very spot that hurts, almost as though he had someone listening behind the cabinet door, or under the council table. To be sure our armies make some progress in Spain; but the Spaniards . . . well, you know something of the Spaniards, sir, I believe. And in any event, it is doubtful that we can go on supporting all these people or even paying for our own part of the war. I have a brother in the City, and he tells me that the funds have never been so low, and that trade is at a stand; men walk about on Change with their hands in their pockets, looking glum; there is no gold to be had—you go to the bank to draw out some money, money that you deposited with them in guineas, and all they will give you is paper—and nearly all securities are a drug on the market! South Sea annuities at fifty-eight-and-a-half for example! Even East India stock is at a very shocking figure, and as for Exchequer bills . . . There was a flurry of activity at the eginning of the year, with a rumor of peace causing pries to rise; but it died away when the rumor proved false, leaving the City more depressed than ever. The only thing that prospers is farming, with wheat at a hundred and twenty-five shillings the quarter, and land is not to be had for love or money; but t present, sir, a man with say five thousand pounds could buy stock, capital stock, that would have represented a handsome estate before the war. Here are some papers and magazine that will tell it all in greater detail; they will depress your spirits finely, I do assure you.”
“I have been wondering, Captain Aubrey, I have been wondering just how I might express my gratitude.” Jack uttered the customary protests, but Palmer went on, “And it occurs to me that although on the one hand a present of money to a gentleman in your position would clearly be unthinkable, even if it amounted to a very considerable sum, yet on the other, a piece of information that would lead to the acquisition of the same amount, or indeed more, might prove acceptable.”
“A kindly thought,” said Jack, smiling in the darkness.
“It is certainly kindly meant,” said Palmer. “But I must confess that it depends on the possession of a certain amount of money in the first place, or of friends who will advance it, or of credit with an agent or a banker, which is much the same thing; for to the rich shall be given, you know, and only to the rich.”
“I should not describe myself as rich,” said Jack, “but for the moment I should not describe myself as destitute either.” His mind searched among the race-meetings for the kind of horse that Palmer was about to recommend, and he was wholly taken aback when he heard the words, spoken very seriously, “As I dare say you are aware, negotiations to end the war have been going on for some time: that is why my principal and I have been to Paris. The have succeeded. Peace will be signed in the next few days.”
“Good Lord above!” cried Jack.
“Yes, indeed,” said Palmer. “And of course there are an infinity of reflexions to be made. But what is to my immediate purpose is that as soon as the news is made public, Government stock and a large variety of commercial shares will rise enormously, some of them cent per cent.”
“Good Lord above,” said Jack again.
“A man who bought now,” said Palmer, “would make a very great deal of money before next settling-day; he might borrow or pledge his credit or make time-bargains with absolute confidence.”
“But is it not wrong to buy in such circumstances?” asked Jack.
“Oh dear me no,” said Palmer, laughing. “That is how fortunes are made in the City. It is not wrong either legally or morally. If you knew for certain that a given horse was going to win a race, it might be said that it was wrong to bet on it, because you would be taking money away from the other man. But when stocks and shares rise, and you profit by the rise, you are not taking money away from anyone; it is the country’s or the company’s wealth that increases, and you profit by the increase, harming no one at all. Of course it cannot be done on a very large scale, for fear of disturbing the money-market. Are you acquainted with the money-market, sir?”
“Not I,” said Jack.
"I have studied it closely for many years, and I do assure you that upon occasion it is as nervous, irrational, and skittish as a foolish woman, given to the vapours. Disturbance upsets it for a long while, which has a very bad effect on the country’s credit. In cases of this kind, therefore, Government limiTRs the information to a small number of people, all of them men who can be relied upon to act with discretion, and not to exaggerate.”
"What would exaggeration amount to?”
“Anything much exceeding fifty thousand in omnium, in Government stock, would probably be frowned upon. Investment in commercial shares could of course be spread out and therefore disturb the market less, but even there I do not thinking much larger dealings would be approved.”
“There is little danger of my being thought indiscreet,” said Jack, laughing; and then, much more earnestly, “I am most uncommonly obliged to you, sir. It so happens that I do have a certain amount of prize-money in hand, and like most men I should be happy to see it increase. May I speak of all this to Maturin?”
“Why, as to that,” said Palmer, “I am afraid it would not quite do, the information being so very strictly confidential. For the same reason, if you do decide to buy, you should not do so through one person, but through several – you agent, say, your banker, and a couple of stockbrokers. The market is very sensitive to sudden purchases in a time of general morosity, above all purchases by a single individual. On the other hand, you could urge Dr. Maturin, and perhaps one or at the most two other particular friends, to buy in moderation; you could urge it very strongly, though without citing any authority nor of course betraying my confidence. Does Dr. Maturin understand the stock-exchange?”
“I very much doubt it.”
“Yet so philosophic a mind might well contemplate the City, and observe the conflict of greed and fear in the minds of its inhabitants, symbolized by the Stock Exchange quotations; but at all events perhaps he might care for a list of the securities most likely to appreciate, or rather likely to appreciate most. I should very much like to mark my esteem for him; although nly at such a distance. You might even find it useful yourself; it is the fruit of much study.’
The Ionian Mission, Chapter 1
[Exchange between Stephen Maturin and his wife, Diana Villiers]:
"You are aware of Jack's predicament, of course?"
"Of course I am, Stephen. Pray do not be an ass." Of course she was: all Captain Aubrey's acquaintance knew that on coming ashore with his pockets full of French and Spanish gold he had fallen an even easier prey to the landsharks than most sailors, as being of a more trusting, sanguine disposition. He had made a disastrous plunge into the arms of a more than usually rapacious shark and he was now deep in law-suits, with the possibility of ruin at the end of them.
* * *
Still more guests, one of them being the banker Nathan, Diana's financial adviser, a man after Stephen's own heart, he too being wholly devoted to the overthrow of Buonoparte, using his highly-specialized weapons with singular efficiency.... She [Diana] had brought some magnificent jewels back from India and the United States, many of which she never wore; and in the present state of war, with Napoleon's astonishing, horrifying victories over the Austrians and Prussians, their value had increased immensely. Nathan wanted her to take advantage of the fact and to put some of the rubies ("vulgar great things," much too big, like raspberry tarts," she said) into a select list of deeply depressed British stocks, a drug on the market -- an investment that would yield splendid returns in the event of an Allied victory at last.