London South East 00:01
You are listening to investing matters brought to you in association with London South East. This is the show that provides informative educational and entertaining content from the world of investing. We do not give advice so please do your own research.
Peter Higgins 00:18
Hello and welcome to the Investing Matters podcast, my name is Peter Higgins and you can find me at Conkers3 on Twitter/X.
Today I have the huge privilege of speaking to Jamie Catherwood, a vice-president at O'Shaughnessy Asset Management, a quantitative long-only equity firm and leading custom indexing provider.
He is also the founder of Investor Amnesia, a company dedicated the financial history content with over six figures in revenue since its launch in 2020.
Investor Amnesia has a weekly newsletter with over 15,000 subscribers, thousands of web visitors and two online history courses featuring lectures from Marc Andreessen, Jim Chanos, Niall Ferguson and and many more.
This has led some multiple appearances on Bloomberg TV, Bloomberg Odd Lots podcast, annual guest lectures at Yale University School of Management, and keynote presentations at finance conferences across America.
Jamie, welcome to this Investing Matters Podcast.
Jamie Catherwood 01:22
Thank you so much for having me, it's a privilege to be here.
Peter Higgins 01:26
Thank you very much, Jamie.
Jamie, I want to start because one of the things that we when we first started speaking you, you made it clear to me that you're half Brit, half American, born and raised up in the United States. I want to start really going back and do a little bit of history myself here, laying the foundations by asking you a little bit about your fantastic family lineage regarding the Sir Frederick Catherwood, Vice President of European Parliament and your writer/Father Christian Catherwood, is that correct?
Jamie Catherwood 01:59
Yeah. That's my uncle.
Peter Higgins 02:01
Uncle, sorry.
Jamie Catherwood 02:03
Yeah. Christopher Catherwood.
Peter Higgins 02:05
Can you share a bit that of that history with us as well, please?
Obviously, they were quite important to you growing up.
Jamie Catherwood 02:10
Yeah there's a couple interesting Frederick Catherwoods, actually, in our history.
I mean, going back a little further in the 1800s.
There was a Frederick Catherwood grew up in the UK, and he met with an American explorer and diplomat named John Wood Stevens.
And the two of them actually travelled through Central America and are credited with the rediscovery of the ancient Maya civilization.
So if anyone's seen the Lost City of Z, then it's essentially that same story, except I think that was for the Aztecs, maybe even the Incas.
And Frederick Catherwood's work was the ancient Maya.
But yeah, he went around Central America for three years and they uncovered like 41 ancient Mayan ruins sites, which I had the privilege actually of visiting one of them last year in Tulum in Mexico, which was fascinating, but all that to say that there's definitely a long line of Catherwoods and historical interest.
And so it's something that basically that whole side of family, we've always had a real passion for history and go into my grandfather's Sir Frederick Catherwood.
He, like you mentioned was in European Parliament for three decades, perhaps kind of helped spearhead getting Britain to join the EU.
And he passed away before Brexit, that was kind of the one positives that he didn't, he wasn't around to see his life's work undone.
But he had a deep passion for history, especially family history, started writing something called Catherwood Chronicles, which one day I hope to finish where he kind of trace back our lineage and detail the kind of story of Catherwood family.
And then as you said, my uncle Christopher Catherwood, has written untold amounts of books on Winston Churchill and World War Two and other periods of World War Two history.
And so again, history definitely runs in the family, and has been a big influence my dad as well as a big historian and passionate about learning from the past.
So it's kind of inevitable that I would end up doing something like Investor Amnesia.
Peter Higgins 04:25
Absolutely.
Thank you very much for that now, please can you share with us your academic background? What you studied and where please, Jamie?
Jamie Catherwood 04:34
Yeah.
So in that vein, I grew up and I think when I was like eight or nine, I decided that I was going to go to the school in the UK, specifically London, my dad was born and raised in London in Ealing.
And he came over in the 80s, to go to Columbia to get his degree, and then met my mum and stayed in the United States.
But when I was young, I grew up going over to London to visit family, and it's just always my favorite city in the world.
And I decided I'm going to go to school there.
And so when it came time to apply to universities in high school, I only applied to British universities, three of the five were based in London, and my dad's philosophy was always if you think that you're going to go into business, then you will probably get an MBA, probably more his generation thinking. But if that's the case, then what's the using studying business undergrad, because then you'll just end up studying business, undergrad and postgrad.
And so do something that you're passionate about in undergrad, and we'll kind of round you out as a person.
And so, for me, the obvious choice was history.
And so I got into King's College London, thankfully, could not have been more central than that.
And so I've definitely fulfilled to the lifelong dream.
And it was a great time I spent three years just reading and writing about history absolutely loved it.
And it was a useful kind of first glimpse into the world of financial and economic history because it took some interesting courses on like the Weimar hyperinflation and British economic history as well.
And so it definitely set me up to continue that interest in research, post college once I got into the working world.
Peter Higgins 06:22
What did you do after college? Where did you go after that to study?
Jamie Catherwood 06:26
So during my time at Kings, I became interested in investing.
And I, of course, was not taking any finance or economics classes, just history.
And so any kind of research or education that I did was on my own.
And I had two friends suggest that I listened to the Invest like the Best Podcast was by Patrick O'Shaughnessy, and Masters in Business by Barry Ritholtz.
And so I really just started listening to those podcasts.
As soon as new episode dropped, I went through the whole backlog, and just wrote down every term I didn't know etc, and slowly learned enough to be able to kind of fake my way through a job interview and get a job in Washington DC at a company called Arthur J. Gallagher in their institutional investment consulting division.
And so for a History Major that have just recently graduated, that was probably the best kind of way to immerse myself in the investment industry.
Because all day every day, all we were doing was meeting with different investment managers across different asset classes and styles, geographies, and just hearing from the portfolio managers and analysts, you know, how they went about constructing their portfolios, finding names, to invest in etc, and just hearing their kind of views on the markets and economy was just a really interesting way to kind of take in a lot of information and learn the whole spectrum, basically, of, you know, types of investment managers and approaches to investing.
And so I did that for close to two years.
And then in that span of time, I had cold emailed Patrick O’Shaughnessy, who again had been the host of invest like the best and said to him, you know, you were Philosophy Undergrad Major, and I was a History Major, and your podcast helped me learn enough to kind of get this first job.
And so I'd love to take you to lunch or get you a drink just to kind of say thank you for what you unknowingly helped me do.
And to my surprise, he responded pretty quickly and said that he would be more than happy to get lunch and appreciated the email.
And so one day in the summer of 2018, I got up at like 4am in DC and drove to Connecticut and met with Patrick for lunch.
And then I actually, once I decided that I was going for lunch. I also figured, you know, hey, I got one of the podcasts I listened to to agree to meet and so I then cold messaged Barry Ritzholtz on Twitter and said, hey, I'm coming up anyway.
And I use the fact that I was getting lunch from Patrick as a way to kind of establish credibility with Barry and say, do you want to get breakfast because I figured if you bought Patrick was willing to meet with me then I can't be you know, too crazy, a guy from the internet.
And so I ended up getting breakfast and lunch with Patrick and Barry and the same day, stayed in touch with Patrick then met Jim his dad O’Shaughnessy, and yeah, I think the year later, Jim O’Shaughnessy called me and said, you know, Patrick, and I want you to come work at O'Shaughnessy Asset Management.
And I put in my two weeks the next day, so it was a quite a ride.
And five years later…
Peter Higgins 09:39
What amazes me is that, you know, you have the conversation with Patrick and then obviously being watched in a sense of how you're going and conducting yourself and how you're establishing yourself across, you know, people watching without you even knowing and then Patrick and Jim approach you and say, you know what, you need to come and work with us.
That's absolutely amazing. Jamie.
Jamie Catherwood 10:01
Thank you.
Yeah, I was thinking back I was such a scruff, I showed up in a suit to lunch with Patrick that this just average pie place I was definitely you know, young and wide eyed but it was great experience and yeah, I feel very fortunate to have been landed a job at O'Shaughnessy and it's been a great ride.
But yeah, power of the cold email you never know what can lead to my philosophy has always been the worst thing that happens if someone says no or doesn't respond, which doesn't really have any material impact on your life.
Peter Higgins 10:34
Brilliant love that philosophy. Now I'm going to briefly talk about O'Shaughnessy Asset Management if we may, just to get a bit of an overview of the sheer scale and size of the company and types of clients that you facilitate?
Jamie Catherwood 10:49
Yeah, so we are a quantitative equity manager.
So we've been managing money since the 90s.
O'Shaughnessy Asset Management as a firm has been in operation since 2007.
But a lot of the team that is still around today, that core unit, some of the people go back to the 90s with Jim O'Shaughnessy, and wrote the book, What works on Wall Street, which your listeners may be familiar with.
He was kind of one of the early pioneers in factor investing.
And so you publish what works on Wall Street then set up O'Shaughnessy Capital Management, and then that went under Bear Stearns, they luckily spun out of Bear Stearns before everything went south.
And then when they spun out, they formed O'Shaughnessy Asset Management.
But so for an almost two decades, the firm has been managing money through SMA accounts.
So that's what kind of makes our firm a bit unique is that instead of offering our strategies through mutual fund, or ETF, we have historically handled accounts in separately managed account vehicle.
And so that’s important, because in 2019, we essentially, like Amazon Web Services was really just Amazon, offering externally all the tools that the company was already using internally, to manage the business, we took all the tools that we had built over two decades, the technology and kind of infrastructure for handling all these separately managed accounts, and put it into a platform that we call canvas, and then essentially turn the keys over to advisors and provided them with a investment platform that they can build models, manage accounts, rebalance everything they would want to do all in one web based platform.
And this has coincided with the rise of custom indexing, which we pioneered that term.
And what that means is that direct indexing, the predecessor, you know, is a strategy where you're simply replicating an index, but instead of owning, you know, say the S&P 500 and ETF, an indirect index, you're owning the S&P 500, but with the individual shares, and so you actually own individual stocks, which means that you can do some really cool customizations, tax management and other capabilities that you're just not able to do in ETF, because you're just pulled in with thousands of other investors.
And so Canvas launched in September 2019. And we're approaching 5 billion in assets on the platform. So it's been quite a growth story.
It's been interesting to be a part of, because when I joined the firm, I think it was six months before we went public with it.
So, I have been along for the ride since day one. And it's been really a great experience to be a part of that that journey.
Peter Higgins 13:51
Sounds phenomenal. Thank you for sharing that, and especially the bit about Canvas and technology that they've used utilized.
Can you tell us a little bit about your specific role as Vice President, Client Portfolio Specialist at O’Shaughnessy please, Jamie?
Jamie Catherwood 14:05
Yeah, so I've had a few kind of different roles in the firm.
As you can imagine, when you're kind of pioneering a new type of category and investment platform, a lot of people do a lot of different things where a lot of hats.
And so I would boil down kind of everything, though, that I've done, it goes down into a kind of view myself as the bridge kind of a normal client portfolio manager role between the research team and the adviser relationships team.
Because with Canvas, we're not offering it to retail, we are partnering with advisor firms, then they use the platform with their clients.
And so being a quant firm, and with custom indexing having so much tax implications, and tax management capabilities, there's a lot of kind of wonky concepts to explain.
And so my role is kind of translating the intricacies of, you know, our portfolio management strategies and the capabilities on the platform into something digestible, that you know, our sales team can use.
And that's helpful for advisors to use with their clients when they're trying to explain the benefits of custom indexing over ETFs, etc.
And so, to me, it's just basically doing exactly what I did as a History Major, just changing the inputs, it's just, you know, taking information, data, etc, and then compiling it pulling out what's important and then putting it into a new piece of content.
Peter Higgins 15:36
Thank you for that Jamie.
Now, for those that don't understand or have not met this terminology before, please could you just share with our global audience Jamie what quantative investing is and essentially how it can reduce human bias and emotions as well please?
Jamie Catherwood 15:50
Yeah. So quantitative investing, you are essentially trying to identify the characteristics of stocks that for decades and SR data, it goes back to 1963.
And essentially what quantitative investing is, is looking at from 1963 to the present day, what are the characteristics of stocks that have outperformed over time? And what are the characteristics and traits of stocks that have underperformed over time?
And then how persistent are those characteristics and characteristics, you can just swap with the word factors, that's just kind of more quantity term, so that you can look for stocks that share those same characteristics today.
And so it's kind of like Moneyball, for stocks.
For anyone that seen Moneyball that kind of light bulb moment for them was all that matters is getting on base.
And to get on, you can only score runs by getting on base.
So what should you look for is players that you can get on the cheap that get on base consistently.
And so those are the looked for traits and that trait being doesn't get on base. And then they try and find undervalued players, with quantitative investors, you're basically doing the same thing.
You're trying to find stocks that outperform the market and look for the kind of precursors to that. So is a company you know, strong earnings growth, strong momentum, are they priced cheaply?
Can you get them at a discount of valuation, and then once you identify those characteristics and factors that you want to look for in companies, then you can set up a systematic trading approach that just looks for these companies, and then rebalances portfolio accordingly. And you can set it up to kind of automate it.
And that's important because, you know, as a market historian, one of the largest the main lessons of history is that humans don't change.
Jim O'Shaughnessy always like to say that human nature is the last sustainable source of arbitrage because while the technology that investors use to trade on the market has changed dramatically, since the first shares were traded in Amsterdam, and 1602, the actual human behavior of investors, making those trades has not changed one iota, it's exactly the same, which is pretty remarkable.
And so taking the human element out of the equation, and not allowing yourself to make those mistakes by over trading and making an emotional decision, if you've just set up your portfolio to be systematic and quantitative, you are really kind of taking out the biggest risk to your portfolio.
And that's you as a human. And so if you just automate it, just like passive investing, you can kind of eliminate a lot of the problems that plague investors.
Peter Higgins 18:47
Thank you for that full response to appreciate that.
Now, Jamie, you talked about the performance and finding the best value and being very, very analytical regarding quantitative investing.
We've got a situation at the moment where the S&P 500 is up 17% year to date.
Meanwhile, we exclude the magnificent seven, which is Google, Amazon, Apple, Meta, Microsoft, and Nvidia and Tesla, the S&P 493 would be up 0.38%
Meanwhile, the magnificent seven is up 65%.
It would appear to me that history is telling us that growth stocks will continue to prevail over value investing for a little while longer, at least what are your thoughts?
Jamie Catherwood 19:37
Forecasting is a dangerous game.
But there's a couple of things in there.
So the first I would just say I think that's a really great way to set up one of the benefits of custom index in Canvas.
And so going back to earlier with the S&P 500, owning it in an ETF or you're just owning the share of an ETF like SPY, or you're owning the 500 securities in an account replicating the S&P 500.
If you own the ETF, and the index is up 17% for the year, it doesn't matter that 493 of those companies are only up you know, whatever you said 0.8% or something for the year, because if you sell that one share the S&P 500 ETF, you will have to pay taxes because you'll have a capital gain.
But in a custom index, because you own those individual securities.
That means that when the magnificent seven stocks are up 65%, you can offset the gains on those seven names by harvesting losses and selling the stocks in the remaining 493 basket at a loss.
And so throughout the year in a given calendar year, 36% of stocks in the index will be down.
And so if you own an ETF, you can do anything with that.
But if you own the same stocks in a custom index, you can just repeatedly harvest those losses and make sure that you are not having to pay as much taxes on your winners, but also just use that as a tax asset that you can offset somewhere else.
So we'll have situations where an advisor knows they're going to sell their business in a year or two.
And so they want to aggressively build up a tax asset and harvest losses so that when they sell their business, they can basically offset the tax cost of doing that.
And so I think over time, as technology continues to improve and costs fall, I think you'll just see an even bigger wave of custom indexing accounts open because it's really just a no brainer, you can own the same exposure, but also get all the tax benefits in addition to any other customizations like ESG, SRI, you name it.
And so, that is kind of the more interesting, I think element of that scenario with the massive outperformance of just a few names is the opportunities that provides for custom indexing, and tax management.
Peter Higgins 22:09
Brilliant. I love that response Jamie, thank you.
Now I want to talk very briefly now about your personal investing strategy.
Before we get to talk about Investor Amnesia, will you just share with me, Jamie, your investing style?
I know you've got some restrictions on what you can and can't do as well.
Jamie Catherwood 22:27
Yeah, so at O’Shaughnessy we can't trade individual stocks.
And so my investing strategy is pretty boring.
It's just, you know, in our 41k, and few passive funds in an IRA.
And so to me, it's keeping things simple, partly because I have to keep things simple walk through for compliance reasons.
So nothing too interesting.
They're just to me at this age, it's important to just keep contributing, you know, keep putting money away, because compounding is the biggest benefit that you can kind of unlock at a younger age.
And so nothing too crazy from a personal investing standpoint, but just trying to stay the course can continue contributing to the portfolio.
Peter Higgins 23:14
Thank you.
So thus far, you see been investing for a while now, what's been your greatest lessons of just applying and compounding your money into the markets?
Because I'm taking it from that even before you went to O’Shaughnessy, you weren't interested in the crypto wave that was hitting everybody else that were in their early 20s.
Jamie Catherwood 23:33
Yeah, it wasn't too interested in that.
But I definitely did make some stupid mistakes.
One of the first stocks that I bought when I was at Gallagher fresh out of college was you probably don't know this one.
But Movie Pass. It was big in the US for a little while it was a company.
But the idea was that you were be able to pay for a subscription. I think they started at like $10 a month, which is just insane to think about, with hindsight.
But for $10 a month, you could go to a movie theater and see unlimited movies per month at the Movie Pass theaters in their orbit.
And so they sent you a debit card, and you paid 10 bucks a month.
But when you went to a movie theater, you use this debit card, and then Movie Pass would pay the movie theater, the full price for the ticket.
And so just already didn't make sense, economically.
But they had this whole argument of you know, will they partner with the movie chains, and they would make up for money and concessions.
And so somehow they'd all figure it out and they'd be profitable. It was started by one of the guys that was at the start at Netflix.
And then he was the president of Redbox, which in the US is like those kiosks grocery stores where you can rent DVDs.
And so in my mind, I thought, you know, this guy knows the movie business.
He knows the movie industry and as a consumer, I mean, it’s great. I love going to the movies.
And so I used to pass and so I bought the stock, nothing crazy.
It's fresh out of college.
So I think I don't know, eight shares $30 or something.
But for I think like a week or two, I bought shares, I think at $80.
And there was a two-week period where every day I logged in, and it was like your shares are up 20%.
And I just thought, wow, this is this just like meme stocks before meme stocks were a thing.
But there was all over Reddit people talking about Movie Pass, etc.
And then everyone, all the smart people on Twitter, were saying this makes no sense.
How can you pay 10 bucks a month, the unlimited movies and the company pays full price for each ticket. That doesn't make any sense.
But everyday you logged into, you know, E-Trade and saw up 20% again.
And so it's just that feedback loop of people saying you're wrong, but you look at your portfolio and you keep making money.
And so you just become blindsided to any kind of criticism because the only thing that matters in investing, you know, is making money.
And if you're doing that, then it just seems like everyone else is you know, being a hater. And so eventually then the stock started pulling 20% every day.
Luckily, I still got out at a profit.
But it was definitely a lesson of, you know, a clear example of how a lot of these manias and stuff throughout history start because I would consider myself a pretty rational person.
But still when you know, you check your account and you just are printing money every day for like a two week period. It's easy to start thinking, I've solved investing, you know, like I must be really good at this.
And so that was an interesting early lesson for me.
And so whenever I talk about these kinds of historical bubbles and manias and talk about the stupid decisions that investors made at that time, I always point out the fact that I am not immune and no one is from these types of behavioral errors because I certainly made it myself.
Peter Higgins 27:05
We all do Jamie. I want to move now please and talk to you about Investor Amnesia how it started the rapid growth of it and how it just took off?
You know, obviously working at the time as well at O’Shaughnessy think at the time, and you launched it and it just went absolutely, almost parabolic.
iI became a mania itself, didn't it? If we can use that term.
Jamie Catherwood 27:31
We can use that to yeah, exactly, but hopefully one that doesn't pop.
Yeah, so after I graduated college and was in my first job at Gallagher, I was a couple months in.
And I've always been someone that really likes the kind of I really love writing, I think that's my strongest skill.
And I missed that kind of deep research and then writing process that I'd been doing for three years at Kings as a history student.
And so when I was at Gallagher, I had the same friend who recommended I listen to those podcasts also recommended to me that I get on Twitter to network, because I've always been someone that really enjoys networking and kind of just meeting new people and growing personal network.
And trying to do that on LinkedIn just met reaching out to people in DC areas, they would get lunch or a drink. And then my friend Connor said, you know, you should use Twitter and obviously didn't believe him, because how could Twitter be useful for networking, but turns out, it was probably the best advice I've ever received.
And so he was very plugged into Finance Twitter.
And so I just went on and followed everybody that he followed kind of quickly picked up on the fact that there were a lot of people sharing really interesting content in the form of blogs, podcasts, etc.
And I thought, I'm not going to teach people you know, I'm a year into my first job in the investment industry, and I'm a history major, I'm probably not going to have too many novel insights on you know how FED decisions are going to impact the market, I haven't zero experience and probably a 10th of the knowledge as these people putting out content on Twitter.
But the one area that I that I do have a kind of knowledge advantage in is history.
And I missed writing history articles. And so I just kind of figured maybe I'll do a short series, like three or five posts on interesting people or moments from financial history.
And so I got an account on Medium and started thinking of what I could, you know, write an article on. And I've published my first one about crypto, actually, ironically, because I really am not that interested in crypto.
But it was about Bitcoin and these massive stones in a Pacific island called Yap, where they would these islanders on the island of Yap would take a canoe to this other island that had a lot of limestone.
And they would basically carve out these huge, like 800 pound limestone discs, and then transport them back to Yap Island.
And that was their currency.
And when they get that the chief would come out and and basically assign a value to all these massive rocks. And what was interesting is that just him assigning a value to it. And people on this island, believing that the stones had value was enough for it to be a viable currency.
And there were interesting scenarios where you know, one of these journeys back from the island is limestone to Yap, the heavy, heavy rock actually sunk through the base of that canoe and went to the ocean floor.
But then when they got back to Yap, and they were doing that kind of valuation process with the chief, they communicated that this stone had fallen to the bottom of the floor and described you know, its size and kind of weight, and someone's still purchased and owned that rock, even though they were never going to see it. And it just kind of exemplified the power of just like the belief and a store of value.
And it was just an interesting comparison for you know, if people think Bitcoin is not viable, just because it's like stupid internet money, all that really matters is if people believe it has value and is a store of value. And so that was my first post. And then from there, to my surprise, people were very interested in this kind of content.
And I think the advantage that I had was that there was nobody, at least in the Finance Twittersphere doing purely financial history content. There are a lot of great writers like Morgan Housel frequently writes about history, but that was not always his main topic.
And so I think most people are lovers of history is just whether they are presented history in the right way. I always think that people who love history and people think history is just names and dates, the kind of inflection point for which way people end up going is whether they had a good history teacher in high school, I guess GCSEs.
And whether they kind of brought those stories to life or just made history about names and dates. And so people responded well to these financial history articles.
And so I just kept writing them more every week. And then eventually, I had a lot of people telling me, I needed to launch my own website.
And I said, I agree, but I have no idea how to make a website.
And then that was when a guy named Adam Collins reached out, never spoken to him before and said, you know, I'll build your website for free. And so it's a deal. And I spent untold hours with Adam building the Investor Amnesia website, and then launched in 2019. And at that point, I also started the weekly Sunday Reads newsletter, which tried to put major events of each week into historical perspective.
And it was really during COVID, that things really went kind of hockey stick, that was a very interesting period to live through, obviously, for everybody. But also, as a history nerd, it was really interesting to see kind of everybody in society start looking back to history, because this was something that nobody had ever experienced before.
And so the amount of interest, especially from an investment perspective, people were just looking for any sort of, you know, guideposts for what the future might look like.
And so, you know, everyone started going back to the Spanish Influenza. And being a real history nerd, I went back even farther to see how to, like, you know, cholera outbreaks in 17th century Amsterdam affected rent, and housing prices. And so things really took off during COVID.
And then, during that, I kind of thought, what's the next step, we can take Investor Amnesia content to.
And that was doing an online course, where I tried to use the network of interesting people mix of academia and actual investment professionals with the passion for history, and try and put together worse where I could pull some of the people from that network I'd created and have them give an hour long lecture on something related to financial history.
The first course was on bubbles, manias and frauds.
And so I had some great speakers legendary Jim Chanos.
He did a lecture on his kind of all his shorts since starting his career in the 80s, which was really interesting, kind of went through all case studies.
And then we had, we'll get some in from Yale talked about South Sea bubble, and we had people talk about the railway mania, and that did well.
And so then I did another course on the financial history of empires, which had Niall Ferguson, talking about the kind of rise and fall of empires and Marc Andreessen, talking about the Golden Age of Piracy.
And the similar similarities between pirate economics and startup economics, which was really interesting.
And so yeah, the growth of Investor Amnesia certainly took me by surprise, if you'd told me in college, that after college, I would be doing financial history in the investment industry.
And it would be a profitable side business, I definitely would not have been ideal, but it's been a great ride.
And I just am very fortunate to have a kind of passion that has been able to get translated into a kind of actual business and website.
And so it's been yeah, it's been a fun ride.
Peter Higgins 36:13
It's been phenomenal. And it's obviously led to be on major news channels, including Bloomberg as well, Jamie, so huge congratulations with that.
I want to touch on if I may with going back into the history and you touched on it a bit earlier.
It looks like we owe a lot to the Dutch entrepreneurs and the investors regarding given us the first IPO, the first dividends the first stock exchange, could you just share with our listeners the importance of what they've achieved and how it relates to what we're doing now?
Jamie Catherwood 36:43
Yeah.
So as you pointed out, the Dutch were very innovative, and they were basically everything that kind of everything related to markets and investing every kind of first, as you said, all goes back to Amsterdam in Holland.
So and even more specifically, the Dutch East India Company, which formed in1602 I think was when the shares first started trading kind of off the exchange.
Well, at that point, there wasn't even an exchange and then in 1609, I believe the Amsterdam Stock Exchange formally opened and trading began.
But yeah, it was this Dutch East India Company that kind of ignited the stock market revolution that has now gone on for centuries.
And there was so many interesting stories at the start there.
Because, you know, they just like everyone was trying to figure out how all this was going to work, there was no real kind of template to follow.
And so you had interesting things like in 1609.
Also, there was the first bear raid and kind of short selling activist campaign by a guy named Isaac Le Maire, who was booted out of the Dutch East India Company board, and then kind of made it his mission to break down the company and started a short selling campaign.
And so the Dutch definitely in the early 1600s, kind of set the path for the global kind of market development to take place.
And even a century later, in 1774, there was a Dutch broker named Abraham van Ketwich, which that actually launched the first mutual fund, it was called Unity, create strength, which is a great name.
And the idea there was to give the average investor a diversified portfolio without having to buy all the individual names.
So essentially the opposite of customer indexing, and he launched it as a passive, equally weighted bond fund.
And one interesting kind of anecdote related to that was there were three fund managers for this Unity create strength fund, and to prevent kind of like systematic investing today is designed to remove the human element out of the equation to reach that same outcome, Abraham van Ketwich, and the two other portfolio managers put all of the securities that they own, so the actual paper certificates into an iron chest that had three locks on it, and each of the fund managers had their own key.
And so to prevent any one of the fund managers from, you know, making an emotional or reactive decision and selling something in the portfolio, the three locks ensured that all three managers that have to come together and unlock the chest with each of their keys and make sure that they were all on the same page.
Peter Higgins 39:44
Fantastic. I love that, love that story, Jamie, I wanted to qualify something with you because you've spoken quite heavily about this.
And when we're referring now to Tulip Mania, and you're basically advocating for everyone to go and read Anne Goldgar’s book Tulip Mania far more accurate than the widely held beliefs by Charles Mackay which are written in his book, The extraordinary Popular Delusions and the Madness of the crowds.
But can you just share what you found in your studies as well?
And just had a little bit regarding the psychology as well, please, Jamie?
Jamie Catherwood 40:21
Yeah, I'm glad you asked me about that, because I actually just recently sent over a list of questions to professor Anne Goldgar, who wrote Tulip Mania.
And we'll be publishing that interview on Investor Amnesia in a few weeks, kind of going through more explicitly what research found.
But yeah, a couple years ago, Jason Zweig at the Wall Street Journal, who is a brilliant writer and hugely passionate financial historian, he recommended that I read this book Tulip Mania, buy Anne Goldgar, because it completely changed his view of Tulip Mania.
And so you get a recommendation from Jason, you definitely check it out and so I looked her up.
And ironically, she had been a senior lecturer of the early modern European history at King's College London while I had been at Kings, but our paths never crossed, or maybe they did.
Maybe she'd like lecture for one of my classes one a week.
But at the time, you know, she would just be another lecturer to me.
So that was funny to find out and made me extra interested in reading the book.
And yeah, essentially, what she found was that almost all of the stories and anecdotes that had been repeated for 400 years are not true, there was a tulip trade.
And there were, you know, high prices being paid at the time for tulips, but all have the kind of ridiculous stories and examples of mania that are included in Charles McKay's book, all come from satirical pamphlets and propaganda that was used at the time of the Tulip Mania in 1636.
And essentially, what had happened is that the tulips first started entering Holland, in the 1600s.
And like any other kind of luxury good, you can really think of tulips in that age, just as art would be today.
It was that kind of like luxury, beautiful item. And so just like art, you know, fetches very high prices today. And there are people that go to a modern art museum and say, you know how I can do that? How is that worth something like that, but people pay the price.
In the 1600s when tulip started entering Holland, there was a tulip trade that started developing merchants that would import these tulips and sell them in there's kind of a whole horticultural community around this trade, people trying to figure out and science behind why certain tulips look certain ways and how they you know, plant them so that they would get prettier colours and be more unique etc.
And as interest grew, and the kind of wealthy class was buying up these flowers, the merchants involved in the trade, they themselves started to make more money and kind of rise up the ranks of society because of this popular tulip trade and the popularity of the flowers.
And the wealthy elite did not like that, because, you know, they wanted to be very much at the top of the social strata in society. And they did not like the fact that these, in their view, kind of lesser people, new money, we're getting more status and wealth and kind of coming for, for their status.
And so what they did was they put out a lot of essentially propaganda, you know, these pamphlets that had stories of people drowning themselves in the canals after losing money and tulip trade husbands that spent all day at the tavern kind of day trading tulip bulbs, and while their families starved at home, people going bankrupt, people buying tulips for the price of houses, the same tulip bulb being traded 100 times by speculators, and all these really ridiculous stories that were all propaganda and designed to have the impact of changing popular opinion against the tulip trade.
And so the problem is, is that a German author in the 18th century, he went through these original sources and found these pamphlets and everything.
And he used the stories and anecdotes in this propaganda as fact, and wrote about it in his book.
And so then a century later, when Charles Mackay is doing research for his book that everybody's still reads to this day, he went and used this German author's work as his source material.
And that was still, you know, just continuing this, this propaganda and stories from the original 1630s tulip trade. And so what's happened is that for 400 years, these propaganda and completely made up stories have been passed down through generations, and we still repeat them to this day.
But really, it's all the result of just this propaganda and poor historical source material. Basically, Charles Mackay is a very bad historian, because he just ripped essentially what this German author did. And so, Anne Goldgard’s research showed that I mean, she spent years in the archives in Holland going through transactions, and she said that she could not find any chain of transactions longer than five for a single bowl.
And so the stories are no single bowl being traded hundreds of times nothing.
She found, I think, only like three people that lost everything.
And they also had other financial issues. So it wasn't even a direct result of this tulip trade.
And then there's the whole story that somehow like the tulip, tulip mania took down the whole Dutch economy when it crashed, which is the furthest thing from true was very kind of small, small group in Holland that was involved in this speculation and tulip trade. And so it's just fascinating. We talked about fake news today.
But this is like some fake news that's lasted for four centuries.
And I think it just shows the power of narratives and how, as humans, we very quickly latch on to stories and just kind of repeat them without actually doing due diligence on the accuracy of these statements.
So it's interesting to watch every time that there's some speculative bubble, especially in things like crypto or NFTs, the first thing people do is compare it to tulip mania as the as an example of tulip trade was stupid. This is stupid, investors are ridiculous.
But all the stuff that they refer to from the tulip mania is usually based on propaganda. It'd be like using Twitter today. And like, you know, a cat like ramped capital, or when it's like the funny finance meme accounts, and using the means that they post as like a statement of fact, 40 years from now.
Peter Higgins 47:38
Indeed, when people do it, I'm conscious of the time.
So I'm just going to run through a couple of quick questions here.
What are the signs that investors and speculators should be looking out for that identify a bubble when it's beginning?
And also when it's going to burst? Jamie, what should they be looking out for? Do you think?
Jamie Catherwood 47:55
So a good framework that I always like to think of and you can kind of see occur and most speculative bubbles, especially when there's kind of like a new industry or innovation is this concept called the Three I’s that Warren Buffett has outlined before where you have the innovator, the imitator and the idiot, and so you'll have an innovator who, you know, creates a new category or a new invention something and they're the first mover in a space and they achieve outsized returns, because they're, they have first mover advantage.
And then, as other people see the success of this company, you know, you'll see a wave of imitator companies.
And so during COVID, one of the obvious examples was in the electric vehicle space, you had everybody excited about Tesla, Tesla shares in 24, up something like 700%, I remember, like halfway through the year, and so people that have missed the boat on Tesla shares, started looking for the next EV company that was going to go big.
And so you had a wave of imitator companies appear, there's so many electric vehicles back deals that went on. And while some of those have been successful, there was a lot of fraudulent ones, with Nikola being the most obvious example.
And so that would be an example of the idiot company. And so you have this imitator phase where perfectly viable companies come in, but they are just essentially following in the footsteps of the innovator.
And then when you reach the idiot phase, you have a sea of companies formed, essentially just to take advantage of this moment. And the fact that investors are just kind of blindly early in their money at anything related to the new category established by the innovator. And so that's when you tend to see a lot of fraud.
And so when you see something kind of burst onto the scene, and there'll be a wave of new companies formed around that, I think investors should always be particularly cautious because you want to make sure that this isn't a company that's just kind of capitalizing on the moment and taking advantage of the fad.
Peter Higgins 50:06
Jamie, this is my last question. You're quoted as saying, history should be thought of as a compass.
How should investors use said compass to navigate modern markets, given all the history lessons that you've taught them? And the history lessons that are out there archived?
Jaime Catherwood 50:23
Yeah, so the, as you said, the analogy that I always like to use is that history is not like a GPS system or a roadmap, you know, it doesn't. If you read about the 1929, crash and other crashes in history, it's not like okay, now I know that you know, when we're this far into a bull market today, you should put your money in industrials or something like that.
It's not very clearly laid out the route that you should take.
But what it is a compass so that at least you can see, you know, through 50, manias and crashes across history spanning centuries, what are the kind of common developments and kind of cycles and patterns to these manias and crashes and so that way, you can at least ensure that when you should be facing north, you're not facing south, and so that you can at least try and predict what is more likely to occur, not guaranteed.
But you know, when interest rates are low, there's going to be more speculation and more fraudulent companies that are formed. And so that in those moments, you should be more cautious about what you're going to invest in and ensure that the company isn't just one that can survive in a world of low rates.
And so, yeah, I think history just reading more of it is the only way to kind of use it well as a compass.
But that is how I think people should think of history and not kind of do you see some of those charts where people like overlay the 1929 crash chart onto the S&P 500 today, like that means anything.
And so yeah, steer away from that application of history and think of it more as kind of a general directional tool that you can use to steer yourself in the right direction.
Peter Higgins 52:13
Absolutely brilliant. Jamie, we're going to have to come back and do another part to the 20 questions here to ask you ladies and gents that was Jamie Catherwood, Vice President at O'Shaughnessy Asset Management, the Founder of Investor Amnesia, also known as the Finance History Guy.
Jamie it’s been an absolute delight. We didn't get to talk about Tottenham Hotspur, your love of Spurs. But we'll do that another time. Thank you for being on the Investing Matters Podcast, take care mate. God bless you.
Jamie Catherwood 52:42
Thank you so much.
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