Monday, May 30, 2016
£21,000 turned into £2m: How to invest like George Frideric Handel
£21,000 turned into £2m: How to invest like George Frideric Handel
George Frideric Handel in a painting by Denner: he started with shares but switched to bonds CREDIT:
Most of the giants of investment we have profiled in this series (such as George Soros, Sir John Templeton and JD Rockefeller) devoted their working lives to the subject. One or two, however, achieved greatness in unrelated areas – and were successful investors in their spare time.
One such was George Frideric Handel, whose compositions include the Water Music and Messiah.
We know a great deal about Handel’s approach because detailed records survive of his dealings with his bank and the custodian of his financial assets – which in both cases was, surprisingly from a modern standpoint, the Bank of England.
But, for whatever reason, this seems to have been the first and only time he owned shares. It was not the last time he invested in the South Sea Company, however. The bursting of the bubble in South Sea shares in 1720 led to a public outcry and pressure from the government for investors to be compensated.
This involved, among other things, the conversion of half of South Sea’s shares into bonds. These bonds were called, confusingly for us today, “annuities”, but unlike current annuities, the fixed income that they paid was perpetual. The conversion took place in June 1723 and the new South Sea Annuities were to pay 5pc annual interest until 1727, when the rate would fall to 4pc.
Although the South Sea Company had started life as a notionally private venture, the involvement of the government and the Bank of England in its restructuring meant its bonds or “annuities” were in effect backed by the state – so they were the equivalent of modern-day gilts.
Handel was therefore getting a decent return of 5pc on what had become a very safe investment, and he seems to have wasted no time in buying them. The Bank’s records show that he bought £150 worth on the day after the bonds’ creation. The Bank’s records deal only in the “par” value of the bonds, however, not the market value, although the price is likely to have been within a penny or two of the £1 par value.
Glimpse of the past: detailed records survive of Handel’s financial dealings CREDIT: COURTESY OF THE BANK OF ENGLAND ARCHIVE
But what was the value of money in Handel’s time? According to measuringworth.com, which offers various means to compare past and present values, £1 in 1723 was worth about £140 today on the basis of the cost of a basket of various goods. This would make Handel’s £150 purchase worth about £21,000 in today’s money.
The composer traded in and out of South Sea Annuities a good deal in the following years, although this activity seems to have yielded little profit.
For example, on March 17 1724, in the midst of the first run of his opera Giulio Cesare, Handel bought £100 of stock, selling it seven weeks later on May 5 at a loss of 10 shillings (roughly 0.5pc). In November 1775 he had built up his balance to £600, but by June the following year he had emptied the account again, incurring a loss of £62 13s 6d.
To these losses have to be added the costs of trading, which at that time consisted of a fixed tax of 7s 9d and a fee of 0.125pc on each stock transaction, in addition to a broker’s commission of about 0.5pc.
Then there was the time and trouble involved in the transactions: in those days the rules required the investor to visit the Bank of England in person if he wished to trade. Handel would normally take a horse-drawn carriage from his home in Brook Street, Mayfair, to the City.
By 1732 he had again sold all his bonds, presumably to fund the staging of his operas, and he did not return to the market for 10 years. But from 1743 until his death in 1759, his portfolio only increased in size.
He invested £1,500 (nominal) in South Sea Annuities on May 2 1743 and by his death owned a total of £17,000 worth of bonds, although he had by that time switched to 3pc “consolidated” government bonds.
However, the market value of £100 in these bonds at the time of his death was £80, so his holding was worth £14,044 – which is about £2m in today’s money. His income from the bonds would have been about £500 a year (worth about £71,000 now).
What lessons can we draw from this story? It could be said that Handel made some mistakes and was lucky not to suffer more severely as a result.
First, when he invested in South Sea shares, he was making the classic investor’s mistake of failing to diversify: buying individual shares is inherently risky and this was a time of fevered innovation and speculation in an immature and relatively unregulated market.
The second error was trading in and out of his bonds. While government bonds tend not to fluctuate greatly in price, limiting the risk of serious losses, the composer was still making the mistake of using an investment account like a bank account – as a source of funds for everyday needs.
He would have been better holding money for these purposes in cash, thereby avoiding the fees and taxes that he had to pay on his bond trading, and reserving his bond accounts for money that he could safely leave alone for years.
But these criticisms of the composer’s decisions have to be set against the great virtue of a consistent savings habit and his choice of asset.
At a time when systematic analysis of shares was unknown and the stock market was far less sophisticated than it is today, the sensible course for an investor in Handel’s position was surely to stick to the rock-solid reliability of bonds issued or backed by the British government, especially as he could get a reasonable rate of interest.
What was the South Sea Bubble?
Founded in 1711, the South Sea Company was promised a monopoly on trade with Spanish South American colonies by the British in exchange for taking over the national debt raised by the War of Spanish Succession.
But the trade concessions turned out to be less valuable than hoped. In January 1720, when the company’s shares stood at £128, the directors circulated false claims of success and in February the share price rose to £175.
The following month the company convinced the government to allow it to assume more of the national debt in exchange for its shares . With investor confidence mounting, the share price had climbed to about £330 by the end of March.
The South Sea Company was part of a wider flurry of speculation . Newly floated firms were seen as appearing like bubbles: 1720 was sometimes described as the “bubble year”.
In June, Parliament, at the behest of the South Sea Company, passed the Bubble Act, which required all shareholder-owned companies to receive a royal charter. The South Sea Company received its charter, seen as a vote of confidence in the company, and at the end of June its share price reached £1,050.
But investors started to lose confidence in early July and by September the shares had plummeted to £175, devastating investors.
How Isaac Newton fared in the South Sea Bubble
Sir Issac Newton also invested in shares in the South Sea Company, but unlike Handel was still a shareholder when the bubble burst.
In fact, Newton invested twice. He bought first in the summer of 1719, just as the bubble was getting going, and sold just months later having almost doubled his money.