words , beating the wisdom of crowds is an extremely difficult feat .
Understanding the wisdom of crowds is essential for investors because it explains why it is so difficult to profit from the identification of mispriced securities . Doing so requires investors to repeatedly formulate superior price estimates using the same information that is accessible to other market participants . Using the weight-guessing contest as an analogy , successful investors must compete in hundreds of contests and consistently outperform the crowd .
To this day , few investors appreciate how difficult it is to accomplish this feat . Even fewer appreciate that the stock operators who dominated Wall Street more than 100 years ago did appreciate the difficulty .
The Gilded Age Dark Arts
The Shaming of the Street
“ Men have been swindled by other men on many occasions . The Autumn of 1929 was , perhaps , the first occasion when men succeeded on a large scale in swindling themselves .”
— John Kenneth Galbraith , author of The Great Crash 1929
In 1925 , the US stock market slowly began a legendary rise . By 1928 , it had reached bubble status , but it continued inflating further until the fall of 1929 . Like all bubbles , the Great Bull Market of the 1920s was explained by the convergence of many powerful forces . These included overly accommodative monetary policy , liberal use of margin debt for speculation and the emergence of a large shadow banking system .
The Roaring Twenties ended with a devastating crash . The Great Depression that followed was then made considerably worse by flawed monetary and fiscal policies . One of the few silver linings of the Great Depression , however , was that the breadth of financial suffering created just enough pressure on Congress to pass overdue reforms . Even though the average investor in the Roaring Twenties knew that stock operators routinely manipulated markets and traded on insider information , they accepted their disadvantaged position while the market was rising . But when the market turned and the depression deepened , tolerance for such behavior evaporated .
The resulting securities reforms upended the power structure on Wall Street . The Securities Act of 1933 required extensive and truthful disclosure for new issues of securities , while the Securities
“ Cheating at cards was always disgraceful . Transactions of similar character under euphemistic names of ‘ operating ,’ ‘ cornering ,’ and the like were not so regarded .”
— Trumbell White , journalist ( 1893 )
During the latter half of the 1800s — an era commonly referred to as the Gilded Age — securities markets were a dangerous place . Few rules existed , and those that did exist were rarely enforced . As a result , Wall Street ’ s robber barons rarely bothered to perform securities analysis . Instead , they employed the “ Gilded Age dark arts ” of market manipulation and insider trading . They knew that outsmarting the market was a crapshoot at best , but cheating the market could be quite lucrative .
It may seem strange today , but use of the dark arts was not a secret while it remained legal in the United States . Newspapers regularly reported the latest stock pools , market corners and bear raids . Journalists were often complicit either because they accepted bribes to publish false information , or they were under direct orders from newspaper owners who were part of these operations . The frequency of schemes varied from year to year , but it was not until the public suffered devastating losses during the Great Depression that they finally pressured Congress to outlaw them .
Portrait of a Gilded Age Dark Artist : Jay Gould , “ The Mephistopheles of Wall Street ”
“ If ever a man ’ s gold was ‘ cankered ’ it was his . He was throughout his entire financial life not only a gambler on a large scale , but a gambler with marked cards and loaded dice .”
— Reverend Louis Albert Banks ( 1892 )
To qualify as a robber baron on Wall Street during the Gilded Age , a person required a healthy combination of greed , intelligence , subtlety , disloyalty and a general deficit of morality . Jay Gould mastered these vices , enabling him to quietly pull the strings on many of the most ambitious schemes . Each one was meticulously planned and brilliantly disguised . His victims often lamented that they were unaware they were under attack , much less of who was orchestrating it . If there was a loophole in a contract , Gould would find it . If a contract lacked loopholes , he created them . He also never hesitated to bribe politicians , journalists , judges , police officers and any other protector of the common good .
Among the more impressive of Gould ’ s deeds was a perfectly executed bear raid on the Pacific Mail Steamship Company . Gould began his conquest by using several allies on the Board to spread rumors of a federal investigation into alleged bribery of government officials . He then planted negative stories with journalists to further depress the stock . Meanwhile , he acquired shares in secret . Once the dust settled , Gould owned a controlling stake in the Pacific Mail , which he acquired at a steep discount to fair value . He then reset shipping rates at a more profitable level for both the Pacific Mail and the Union Pacific ( a Gould-controlled railroad ). He had wielded the Gilded Age dark arts to execute a perfect bear raid .
24 FINANCIAL HISTORY | Summer 2024 | www . MoAF . org