When David Ricardo started out in business at the age of twenty-one, his property base amounted to £800. By the time he died in 1823, a mere thirty years later, his estate was worth an unimaginable £675,000 to £775,000, from which he enjoyed a yearly income of £28,000. No other economist, not even John Maynard Keynes, has reached this level of affluence.
Ricardo has the distinction of writing erudite theoretical works and making a for-tune. Few economists can boast doing both. Keynes would be one of the few to join Ricardo in this distinction, amassing an estate worth £650,000 during the Great Depression while writing The General Theory.
How did Ricardo do it? If he had written a book on investment, what secrets would he tender?
The Arbitrage King
Ricardo made his money primarily as a stockjobber, handling his own accounts, rather than as a broker . A stockjobber might be compared to a specialist on the floor of the New York Stock Exchange who handles large sums of stock and constantly makes a market in specific issues. During the early nineteenth century, most transactions involved government bonds, known as consols, although great chartered companies such as the Bank of England and the East India Company issued shares. Otherwise, there were no corporations or corporate stock at this time.
Ricardo made most of his money early on as an arbitrager of government debt. He played the forward market, which was ten times bigger than the cash market. A contemporary wrote of Ricardo: “He is said to have possessed an extraordinary quickness in perceiving in the turns of the market any accidental difference which might arise between the relative price of different stocks [government bonds].” His transactions would tend to be short-term and he would “realise a small percentage upon a large sum,” typically £200 to £300 a day. He wrote a friend, “I play for small stakes, and therefore if I’m a loser I have little to regret”.
Historians have debated the extent to which Ricardo profited from insider dealings and stock manipulations. According to Professor Norman J. Silberling, Ricardo often played the villain, a leader of an “inner clique of exchange professionals” known as “bear-jobbers” who would attempt “bear raids” on the government loan market. By panicking the public and pushing consol prices sharply lower, Ricardo and his band could pick up consols on the cheap and profit from high interest rates. Silberling accused Ricardo of writing his pamphlet, The High Price of Bullion, in early 1810, in order to bring about a fall in bond prices. Indeed, the price of bonds fell abruptly in late 1810 and one of the Goldsmids, a primary financier of government loans, com-mitted suicide. However, Piero Sraffa, Ricardo’s biographer, disputes this claim, noting that Ricardo had made a firm bid on a government loan in 1810 and it would have been to his disadvantage if consol prices had fallen. It should also be noted that Ricardo failed in his bid.
Ricardo’s Golden Rules Of Investing
Ricardo never wrote down his trading techniques, but business associates said that he held scrupulously to his two “golden rules”: “Cut short your losses” and “Let your profits run on.” He also took advantage of undervalued and overvalued situations, based on the observation that the investing public often exaggerates events, and he may at times have engineered these overbought and oversold conditions, as noted above.
Ricardo was no miser, however. As quickly as he profited, he moved his wife and family into larger and more expensive housing, and frequently vacationed in Brighton. He became a country gentleman, buying Gatcomb Park, a large estate, and investing in land, mortgages, and French stocks after retiring around 1815.
Ricardo, The Financier
Ricardo’s budding financial career took a gigantic leap forward when he began bid-ding as a loan contractor for the government. During the Napoleonic wars in the early 1800s, the government relied on the Stock Exchange to finance its burgeoning expen-ditures. Ricardo and his partners were soon competing against some of the biggest names in high finance, such as the Goldsmids, the Barings, and the Rothschilds. The successful bidders received a special bonus from the chancellor of the exchequer. Ricardo and company were so successful in their bidding that they obtained every government loan during the war years of 1811 through 1815.
The Day Ricardo Made £1 Million Sterling
The last and biggest loan of the war (worth £36 million) was raised on June 14, 1815, just four days before the Battle of Waterloo. The price of the bonds was extremely depressed because of the size of the loan and the uncertainty of the outcome of the war. There were four bidders for the loan contract, but Ricardo’s firm won.
Ricardo bravely held onto his position in the deeply depressed bonds, his biggest gamble ever. Other more timid investors sold early, before the Battle of Waterloo (see Malthus’s story below), but not Ricardo. He held on after the shocking news arrived that Wellington had won the battle against Napoleon. The government consols sky-rocketed and Ricardo became an instant millionaire. The Sunday Times reported in Ricardo’s obituary (September 14, 1823) a popular rumor that during the Battle of Waterloo Ricardo had “netted upwards of a million sterling”.
Ricardo Helps His Friend Malthus
Ricardo frequently helped his friends, such as Robert Malthus, with stock market tips. Prior to the issuance of the Waterloo bonds, Malthus asked his close friend to reserve for him £5,000 of the new loan. As the Battle of Waterloo approached, Malthus got scared and begged Ricardo to sell his position early at a small profit, provided this was not “either wrong, or inconvenient for you.” Ricardo promptly sold Malthus out, and consequently Malthus never participated in the bonanza enjoyed by Ricardo.
[Editor's Note: The above excerpt is reprinted with permission from Mark Skousen's The Making of Modern Economics: The Lives and Ideas of the Great Thinks (Second Edition). It won the Choice Book Award for Outstanding Academic Title for 2009, and Daily Reckoning readers get a 25% discount by entering discount code DM928 (expires 3/31/10.). Get your copy here.]
Dr. Mark Skousen is a economist, financial advisor, university professor, and author of over 20 books. He has taught economics and finance at Columbia Business School, Barnard College at Columbia University, and Rollins College. In 2005, Grantham University honored Dr. Skousen by renaming its School of Business "The Mark Skousen School of Business." He has been a columnist for Forbes magazine and has written articles for The Wall Street Journal, Liberty, Reason, and The Journal of Economic Perspectives. Dr. Skousen has appeared on ABC News, CNBC Power Lunch, CNN, Fox News, and C-SPAN Book TV.
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