Transcripts For CSPAN3 History Of Investment 20160327 : vima

Our friends at Columbia Business School publishing led by miles thompson, who joins us today, have done it again. This time, it is a book on investing. It is the history written by Norton Reamer and Jesse Downing. It covers thousands of years. Interviewing socrates on Real Estate Investing all the way through to Warren Buffett and the legends of today. Along the way, we will meet many individuals, many products, themes from investing. We will learn about the sinners, an entire chapter on market manipulation, Insider Trading, and fraud. This book is very well researched with a very comprehensive bibliography. So much so that i was just talking to norton a while ago and he said they had 10 researchers for this, which is unheard of and terrific. They have done their homework. Norton reamer has had a storied wall street career. He was a former ceo and chief Investment Officer of putnam investments. Aner that, he left to grow Investment Management Holding Company that over 20 years and accrued 200ns billion in assets under management before it was sold. He is still active with the Consulting Firm called unicorn. As coauthor is Jesse Downing, mentis an investment manage,me professional who graduated from harvard where he studied economics and math. The book will be on sale after so i encourage all of you to buy it if you like what you hear. The authors will be happy to autograph it for you. We all heard the phrase speculation is as old as the hills. Today we will find out if investment is as old as the hills as well. It is my pleasure to turn it over to norton and jesse. [applause] here ine honored to be the center of finance and wall street. I must admit i was not knowledgeable about the museum of American Finance until richard offered it to be an endorser of our book. He is very active so thank you for having us. Pan was then and youth. I am probably the oldest author you ever heard at 80 years old. Jesse maybe the youngest at 25. The book was put together by this group of 10 Different Research associates. Most of them harvard undergraduate economics majors. It benefited from a lot more wisdom than the original author had ever had in his possession. Let us talk about this now in an organized kind of way. The Research Project that led to this book, investment a history, began in 2010. Let me interrupt with an incident anecdote. Add a with publishing to history because i suspect that would be more interested in investment than history, but an amazing fact. Thousands ofeds of books that have been written on investment over the years, nobody, i mean nobody has written a longterm history. We were astonished. Jesse admitted to me before he became a Research Associate that he did research on that because he did not think it was true. We verified. There is no such thing as longterm history. On that point alone, this book stands uniquely. In any event, i sold my last 2008 by way of back patting although it was no wisdom on my part. The tradition of heard in august 2008, 20 days before lehman brothers. Not because i figure that out and obviously not because someone else to get that out else figure that out. In 2010, i had a twoyear commitment, but i discovered it was not taking all of my time. I came upon this idea of researching the history of investment. A book was not really uppermost in my mind at the time, but learning more about a field in which i had devoted 50 years of my life was very much in my mind. I began the project. I begin by visiting with a harvard Business School professor by the name of david moss, who said to me you need Research Associates. Boy was he right. The fact of the matter was i had never done research of this kind in any way before. With harvard economics department. I committed to the secretary a request for a Research Associate. They advised me to pay the going rate. Zero responses. I called her back. I said can you tell me what is the going rate . She said 10 to 15 an hour. I said how about 20 an hour . Worked like a charm. Was thevent, jesse second of these Research Associates. He stuck with the project and stuck with it so effectively that about three years later, i asked him if he would become my coauthor, and goodness he did. Thank goodness he did. We cannot figure out if he is five times smarter than i am or 10 times smarter than i am. Another friend said 100 times, but i dont accept that. Early on in the research, we had a revelation. Although there had been a vast amount of books written on investment, literally, there was nothing like a longterm history available. To relieve your minds of potential readers, this may be a misuse of a word. The book was written logarithmically. The first chapter covers 16 pages in 3000 years. It becomes more micro as it becomes to the present, which i think is more useful. Feely event, we came to that understanding the history of the field is incredibly important in being able to predict its future. Being an investor who understands what has gone before investing would be incredibly valuable with expecting what it is like in the future. In addition , significant changes have occurred over the millennia that investing has been underway. There has been widening of Investment Opportunities over time that is remarkable. Think about this. If this is a 4000 year history, the common man, and i dont mean very common man or woman, i need Business People like ourselves and so on simply could not until the last last 400 years. 90 of the time that investing has existed, it has not been available except for what we referred to in the first chapter as the power elite. Let me talk now. We cannot go over the 4000 years, although as new authors we would probably if you would give us a chance. Let me talk about the highlights of what we will try to cover. Number one, the overarching theme of this book, and this may astonish you, is the democratization of investment. Remember, democracy and equality are not the same. We are not saying all investors are equal. We are saying and investment is no available to so many of us, to billions of billions of people in the developed world. It was anything but that until 400 years ago or so. The second point that we emphasize is the concept of retirement, of funded retirement. It is amazing to consider the fact that funded retirement is no more than 150 years old at the outside. That were some gimmicks the roman state worked out for roman soldiers. When roman soldiers were ready to retire, they decided they did not want them around rome so pends and her the them land away from rome, but retirement is new. That is the second area we want to cover. The third area is what we call rose and benevolenc malevolencee field. I had to be dragged kicking and screaming into this subject because i do not think it was dominant in one expres affected investment in what effective investment. We have a major intersection. It begins with bernie made and ks back to carlo ponzi off and works back to carlo ponzi. Is therth thing we cover increase in sophistication in the handling of investment in two categories. One is the growth of investment theory. Investment theory was not born until about 1900. That is interesting. It has cast lots of doubt in some areas and lots of affirmation in others. And this may be controversial with some of you, we think we have gotten a lot better as a National Economy in managing Economic Policy for the benefit of investors. There is all kinds of opinions on that. I would not want to Poll Congress on how they feel about it, but the fact is we think we established in the book and we put an acquisition the. Period ofat the the Great Depression and how it was wrong and the Great Recession and how it was in over was inadvertent. Lets talk about investment and what is important. Iswe define it, investment, the commitment of resources in the hope of earning a return in the form of income, gain, or both. The activity of investment is remarkably pervasive and not just pervasive in economics. It is pervasive in culture, all kinds of institutions, and in the development of society. Without risking Capital Investment effort and treasure, it is very difficult to advance any kind of a program. Executives,leaders, and so on is to make decisions that advance these things. The head of a museum is an investor and is making investment decisions, for example. Society dependd on investment to improve. We have claimed this is a basic not just asociety, basic element in economics. Let me talk about democratization now for a minute because this may be controversial to some of you. If you study the history of realizent, you begin to at the same time, especially in the 17th and 18th centuries, that political life was democratizing. Investment light was also in need to be democratized. It was leading to certain important developments that were crucial in that stage of things. Example, the corporate form was essential during this period. You all heard of these joint Stock Companies. It was the First Corporate form to exist. It has limitations compared to modern corporations, but it was an important step forward. The second vital step forward was the Industrial Revolution because for the first time, we created sources of capital for every man and every woman in that sense. Before that time, all of the capital was in the hands of the nobility or the church or the military or royalty itself. Began inck companies the 16th century. There was a company which treated with the russian empire britain. Out ofh century britain. A the 17th century, it was Company Called the Virginia Company that did not produce a lot of oil but they made an effort at it. Joint stockearly companies do not have the characteristics we take for granted today. One of these was limited reliability. You can think about how important the fact of a corporation has limited liability. Days, if youarly invested in a company and the company went bankrupt, you were on the hook. That would lead to great suspicion between investors. No one wanted to go into a venture with an investor who did not have a lot of resources because when they came around to pass the hat for losses of the company if that happened, one person was going to be exempted and the other people left with the responsibility. Over time, the joint Stock Company became more sophisticated. Maybe one of the first examples of the higher level of sophistication that you heard of was the east India Company because it was one of the first times that management and ownership were separated. Everybody if you buy a stock today, you dont expect to run the company. Ou expect to be investing and someone wil have the responsibility. The skeptics about the separation of management and ownership pretty impressive. No lessple, adam smith, than adam smith, denounced joint Stock Companies and denounced the east India Company because he said and see if i can quote him here, he argued that fiduciaries could not be fully dutiful and completely concerned about the welfare of shareholders because the cap capital was not their own. We still have this problem today, but we made great efforts to improve situations. By the way, we believe from our research that he was much influenced is something you bubble, the south sea which was a case where promoters promoted a company that was not in the interest of shareholders. Eventually come the shareholders suffer the consequences and so did the promoters. Now we grant equities, we do stock options, we have performance fees. We encourage managers to reinvest in the business. While there has been improvement, not all the problems have been solved. Now that we talk about the Industrial Revolution. It was of course a transformation that we all know about. And rann the 1760s basically into world war i. The first one was basically involving textiles and iron production and things of that sort. The second one was much more sophisticated and involved much more technological advance. Revolution has a bad rap in certain ways and earned it. Richard working conditions, urban squalor, social strength, but they altered the trajectory of the economic fate of the nonelites. For the first time, common people, including merchants, Small Business owners, factory workers, inventors, entrepreneurs, were able to create and share in the economic surplus. They did not have access to surplus before. This was a revelation. Prior to industrialization, most of humankind, and this is worth thinking about for a minute, lived their lives without the assumption that their standard of living would or could improve over time. I think this is not covered directly in our book, but you can look at a thousand year period before the Industrial Revolution where the standard of living did not rise. It is interesting to me and probably you that there is some question being raised about that now. With only the claim of having done a little Historical Research is that that is not right. We will continue to advance the standard of living, but maybe at a slower pace than we got used to for a while. Growth we think is still part. Element the emergence of Public Markets was the third element. That was incredibly important. For the first time, people who became empowered savers, savers with their own money who could invest it in some way, met Investment Opportunities. Dt happy effects of it ha the effect of creating brokers. I am not sure what they were called early. Listing prices, depth of market, regulation. Very important. We have a section on this. And to lubricate the exchange of shares. It also created the opportunity to diversify. Think about how difficult it was to diversify your ownership of things before they were Public Markets. You would have one investment. Tohave multiple investments, think about a diverse portfolio with virtually an impossibility even for the very very wealthy and very powerful until Public Markets were created. Even with all these advancements and improvements, the democratization of investment is far from complete. Just as there are countless constituencies that remain marginalized, so to there were large numbers of people still excluded from participating in the enterprise of investment. s not deepened ourselves lets not delude ourselves to thinking democratization is done. There is a long way to go. Levy talked for a moment before i pass it to our key speaker here, and i mean it, about retirement. I want you to think about retirement. Fund in retirement, as i indicated a moment ago, as we know it today only emerged about 150 years ago. It is a blink of an eye over the history of investment. Most of the history of investment, most did not expect to retire. You died at your workbench or in the field. When you could not work, you relied on your family to see you through, not some fund you had created. There were no Financial Resources to provide security in the final years of life. There were a few early steps. The english created poor laws in 1601. Houses created in the colonies in the united states. Whopresbyterian ministers must have led a suitable lifestyle and to this created insurance and Retirement Funds for themselves to retire from the church in the 1700s. Savings and societies began in the 1800s. It was not until the rise of employment in urban areas, more factory like employment in the early 1900s, that private Pension Funds began in earnest. Most were managed by insurance companies. They survived the depression very well. Better than most funds we know about throughout the depression. There were 1930s, hundreds of thousands of workers covered. Also in the 1930s, Social Security was created. By ae way, it survived onevote margin in the Supreme Court in 1937, the same way obamacare survived by one vote of margin recently. It is amazing to think about that. Defined in the 1970s, Contribution Plans in the form of 401 k s grew. Today, private Retirement Funds in the u. S. Alone totaled 24 trillion. There is probably a comparable amount in other developed countries around the world. They are the single largest impact of the democratization of investment. Even this Phenomenal Growth has raised questions because gradually over the last several decades, the responsibility for funding your retirement has moved from corporate shoulders and government shoulders to our shoulders. Bs, and403 that is creating some doubt this fight the number i decided in the future i just cited in the future. Despite the vast sums devoted to retirement, there is increasing uncertainty about these sums in the future. Levies that step aside and asked jesse to come up and talk to you ask jesse to come up and talk to you. [applause] i will be back. [laughter] Jesse Downing thank you. If three brave souls showed up and we were two of them, i would be thrilled. Very happy to see you all here today. The first part of my tal