South Sea Bubble & Initial Coin Offerings Similarities

The craze surrounding cryptocurrencies and initial coin offerings is an echo of the South Sea Bubble that hit England in the early 1700s.

South Sea Bubble

The South Sea Bubble wasn’t just a bubble related to trade involving the South Seas, the waters off South America. It was also a joint stock bubble

The South Sea Company was a joint stock offering to fix the finances of England. Ultimately, it was a scheme. No trade would reasonably take place but the company’s stock kept rising on promotion and the hope of investors.

The joint stock of the South Sea Company rose so much and captivated the attention of so many, that “enterprising” individuals looked to raise money by launching their own stock offerings.

It was an unregulated market and all manner of initial stock offerings were being floated.

  • For the improvement of London and Westminster.
  • For settling the island of Blanco and Sal Tartagus.
  • For the importation of Flanders Lace.
  • For purchasing land to build on.
  • For trading in hair.
  • For breeding horses.
  • For a perpetual motion machine.

And much more. Some plausible and others absurd.

But no person was more “enterprising” in their stock offering than the following man. From Charles McKay’s classic Extraordinary Popular Delusions and the Madness of Crowds

But the most absurd and preposterous of all, and which showed, more completely than any other, the utter madness of the people, was one, started by an unknown adventurer, entitled “company for carrying on an undertaking of great advantage, but nobody to know what it is.”

Next morning, at nine o’clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o’clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2,000 pounds. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.

The demand or joint stock offerings grew so large that people threw caution to the side. They did not want to miss out on the next big winning joint stock offering and they would pay almost any price.

Cryptocurrencies & ICOs

Fast forward to today and the buzz around Cryptocurrencies.

The two leading names are Bitcoin and Ethereum. Both cryptocurrencies have seen their trading values skyrocket within the past year. And the rise has attracted a lot of individuals looking to invest in the next great thing.

It has also attracted “enterprising” people looking to raise capital through an initial coin offering (ICO).

An ICO typically involves selling a new digital currency at a discount — or a “token” — as part of a way for a company to raise money. If that cryptocurrency succeeds and appreciates in value — often based on speculation, just as stocks do in the public market — the investor has made a profit.

Unlike in the stock market, though, the token does “not confer any ownership rights in the tech company, or entitle the owner to any sort of cash flows like dividends,” explained Arthur Hayes of BitMEX, one bitcoin exchange.

An initial coin offering is unregulated means to bypass the traditional way of raising capital for a new venture.

Afraid of missing out on the next big thing, people are willing to hand their money over no matter how thin the premise.


Dentacoin is the first Blockchain concept designed for the Global Dental Industry. The Dentacoin ERC20 token is configured to be used globally by all individuals.

Dentacoin aims at improving dental care worldwide and making it affordable through utilizing the Blockchain advantages. We believe that empowering patients to become an active part in the industry development process is the key to shaping the future of dental care.


The coin issuer is asking for $100 million to make coupons for marketing services with its parent company, Gravity4.

Stox Tokens needs $30 million for what are essentially casino chips to use in a prediction market


Hubii seeks $50 million so writers, musicians, and filmmakers can cut out Netflix, Spotify, and YouTube and somehow still get paid.

Paragon Coin

Paragon requires $100 million for a farm-to-pipe cannabis supply-chain tracking and payments system.

And many others. Some more absurd than others.

How Does It End

The South Sea Bubble ended when the English government enacted laws to stop the excessive offerings.

The unregulated markets became regulated.

Most likely the same thing will happen to cryptocurrencies and ICOs.

When the cryptocurrency markets and the “me too” initial coin offerings become too big to ignore, governments will look to regulate them.

China already banned cryptocurrency exchanges.

ICOs are essentially unlicensed security offerings. The SEC and U.S. regulators don’t like that.

When the bubble bursts I don’t think the fist movers and the established players like Bitcoin and Ethereum will go away. Blockchain technology should find its way into everyday life.

Will all these “me too” offerings continue to exist after the bubble bursts?


Avoid the FOMO

Instagram Ad to day trade bitcoin.

If the fear of missing out on the cryptocurrency craze strikes you and you’re bombarded with all sorts of “get rich quick” cryptocurrency schemes remember this.

If you think you want to invest in an ICO remember you’re giving your money to a stranger on the internet who might be using a fake name, who probably isn’t building what they say they will, whom you can’t sue for fraud and is probably stealing your money to buy a Porsche.

Howard Marks’ Checklist

One of our core tenets at American Money Management is we can’t predict the future. We don’t know what the equity markets will do this year, next year, or the year after that.

No one can.

Capital markets are dynamic systems. There are too many participants involved and too many variables interacting and influencing each other to make accurate predictions about the future.

What we can do is take the temperature of the capital markets. To see where we stand along the risk spectrum. Are capital markets pro-risk, anti-risk, or somewhere in between?

This is the position of Howard Marks, Chairman of Oaktree Capital. I can’t remember in which one of his memos he put this in but Howard Marks created a checklist for gauging the capital markets’ appetite for risk. I recreated Howard Marks’ checklist below.

Market Risk Checklist

Download Howard Marks’ Checklist

I recently went through the checklist and I found myself checking all the boxes on the left side.

I view the market as being very pro-risk.

I tried to be objective as possible when filling out the checklist but I can’t escape my biases. I could have easily over estimated how much risk the market is taking. If you work with a team or a couple other people, I would recommend each person complete the checklist on their own and then compare each other’s answers.

Avoid Companies with CEOs Who Golf Too Much

Malcom Gladwell is back with his second season of Revisionist History. The first episode is A Good Walk Spoiled

In the middle of Los Angeles — a city with some of the most expensive real estate in the world — there are a half a dozen exclusive golf courses, massive expanses dedicated to the pleasure of a privileged few. How do private country clubs afford the property tax on 300 acres of prime Beverly Hills real estate? RH brings in tax assessors, economists, and philosophers to probe the question of the weird obsession among the wealthy with the game of golf.

What does golf have to do with investing?

CEOs Who Golf Too Much

The gem in this podcast starts around 5:35 minutes and continues till 9:19. If you include – and I don’t know why you wouldn’t – the little dig at former Bear Stearns CEO Jimmy Cayne for leaving early on Fridays to play golf while his firm collapsed.

“The more golf a CEO plays, the worst his firm does.”

“The more golf a CEO plays, the more likely he is to be fired.”

Some further reading.

Fore! An Analysis of CEO Shirking

Ron Baron’s Tesla Predictions Versus the Base Rate

On Tuesday Ron Baron appeared on CNBC and made some bold Tesla (TSLA) predictions.

Ron Baron’s Tesla Predictions

To summarize, Ron Baron believes in 2.5 years Tesla will achieve the following.

  • By 2020, Tesla’s share price will be $1,000
  • By 2020, Tesla will have $70 billion in revenue
  • By 2020, Tesla will sell 1 million cars per year
  • By 2020, Tesla will have $10 billion in operating profit

Tesla (TSLA) is already a large holding for Ron Baron and his fund company Baron Asset Management. Tesla’s stock has done well for them since their purchase in 2014. Because of this, Ron is making his predictions from an Inside View.

Sales Growth from the Inside View

Ron is focusing too much on how unique he believes Tesla to be.

This is not to say Ron and his team did not create financial models, develop forecasts for Tesla’s potential total addressable market, and predict Tesla’s future market share.

They did.

But they made their models and assumptions from an Inside view. The Inside View is prone to overly optimistic assumptions and overconfidence in one’s own abilities.

Ron Baron believes Tesla will grow its trailing twelve-month sales from $8.55 billion to $70 billion in 2.5 years. A compound annual growth rate of 131%.

Maybe Tesla achieves this.

But did anyone at Baron Asset Management ask, “In the history of publicly traded companies, across all sizes and industries, how many companies were able to grow their sales at a compound annual growth rate of 131% over 2.5 years?

Sales Growth from the Outside View

Michael Mauboussin and his team at Credit Suisse created the Base Rate Book to help with the outside view. The Base Rate Book addresses our sales questions above.

Sales Base Rate
Table from The Base Rate Book

Only 2.5% of all companies since 1950 have achieved a compound annual growth rate over 45% during a 3-year time span.

I’m willing to bet this rate drops below 1% for a CAGR greater than 100% over 3 years.

An even better Outside View is to see how many companies with sales numbers similar to Tesla’s have achieved a compound annual growth rate greater than 45% for 3 years?

Outside View for $7-12 Billion in Sales

The Base Rate Book also has sales data broken down into smaller cohorts.

Tesla had $8.55 billion in trailing twelve months sales which places it in the $7-12 billion sales cohort.

Base Rate
Table from The Base Rate Book.

Only 0.7% of companies with $7-12 billion in existing sales were able to achieve a compound annual growth rate greater than 45% over 3 years.

Goal of the Fundamental Investor

From the introduction to the Base Rate Book

The objective of a fundamental investor is to find a gap between the financial performance implied by an asset price and the results that will ultimately be revealed. A useful analogy is pari-mutuel betting in horse racing. The odds provide the probability that a horse will win (implied performance) and the running of the race determines the outcome (actual performance). The goal is not to pick the winner of the race but rather the horse that has odds that are mispriced relative to its likelihood of winning.

As a result, investing requires a clear sense of what’s priced in today and possible future results. Today’s stock price, for example, combines a company’s past financial performance with expectations of how the company will perform in the future.[emphasis added]

The fundamental investor needs to compare their Inside View assumptions to the Outside View.

The fundamental investor needs to ask what has happened to other similar companies in this situation. Then determine if the current stock price and its implied assumptions represent a mispriced bet or an overpriced bet?

Is Tesla a Mispriced Bet or an Over Priced Bet?

Tesla’s share price is trading at an all-time high near $380 per share. Tesla’s current market capitalization is $62 billion. This is greater than Ford’s at $44 billion and General Motors’ at $52 billion.

GM Market Cap Chart

GM Market Cap data by YCharts

Ford and GM’s trailing twelve-month revenues are $153 billion and $170 billion respectively. Tesla had $8.5 billion.

GM Revenue (TTM) Chart

GM Revenue (TTM) data by YCharts

Ron Baron is predicting Tesla will grow its sales at a compound annual growth rate of 131% over the next 2.5 years.

Only 0.7% of companies with $7-12 billion in existing sales has ever achieved a CAGR above 45% over 3 years since 1950.

Given Tesla’s current share price, market capitalization, and implied assumptions about its future does Ron Baron’s bet look mispriced or over priced?