Hindsight 1720, South Sea Bubble X FTX Bubble (Issue #36)
Hindsight is 20/20, by looking at financial history you can learn a lot about the patterns markets, investors, and speculators follow. To reference a specific historical event let’s talk about how the South Sea Bubble of 1720 and John Blunt were similar to FTX and Sam Bankman Fried (SBF) today.
The first key part of investing that many overlook, from 1720 to today, is understanding what you are investing in. Just like many did not understand what was actually happening with the supposed “trading company” most of the investors/users of FTX did/do not understand what both has and hasn’t been happening within the company’s financials. The balance sheet is not a document to be underestimated. For example, with the South Sea Company debt was used as the base for the company. This is not a strong base especially when the company doesn’t have any tangible assets. FTX similarly used some cryptocurrency vehicles on their balance sheet to manipulate their financial situation, this makes the balance sheet in actuality not balance.
This next investment hurdle comes in the form of a question, “why does the company need your money?” While it is beneficial and often important to get some idea of how much money an investment can make it is also important to think about why the company needs the investment. In the case of both FTX and the South Sea Company, they were taking money to support a funnel/vacuum of money out of the business which could only be sustained by constant new investment.
Finally, never invest based on FOMO. Following the crowd or making transactions under pressure based on the actions of others is unwise. In truly good investments they don’t need to be timed and we all live long enough to have multiple potential investment opportunities that no one opportunity is worth the risk of an impaired decision-making process.
For those who have been following me for a while, you will know I initially wrote on financial history, including the South Sea Bubble, during 2020 and 2021. If you weren’t a viewer back then or want to brush up feel free to check out my old blog.
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Until Next Sunday,
Soren