Devil Take the Hindmost: A History of Financial Speculation” is a book by Edward Chancellor that chronicles the history of financial speculation from ancient Rome to modern times.

Chancellor explores different examples of financial bubbles and manias throughout history. He delves into the psychology of speculation, how it influences economies, and how it leads to financial crises. Some of the key episodes he covers include:

1. The Dutch Tulip Mania: This was one of the earliest known financial bubbles, where prices for tulip bulbs in the Netherlands skyrocketed and then crashed in the 17th century.
2. The South Sea Bubble: A speculation mania that ruined many British investors in the 18th century.
3. The 1929 Wall Street Crash: The most devastating stock market crash in the history of the United States, signaling the start of the 10-year Great Depression.
4. The 1980s Junk Bond craze and subsequent Savings and Loan crisis.
5. The Japanese real estate and stock market bubble in the late 1980s and early 1990s.
6. The Dot-com bubble: A stock market bubble caused by excessive speculation in Internet-related companies in the late 1990s.

Through these and other examples, Chancellor analyzes recurring patterns in speculative behavior and the often catastrophic consequences that ensue. He argues that financial speculation—driven by fear and greed—is an integral part of human nature and is likely to lead to more financial crises in the future.

By learning from historical financial events and understanding speculative behaviors, money managers can better strategize their investment approaches, make informed decisions, and ultimately protect their wealth. Here’s how the wisdom from this book can be incorporated into a money manager’s practice:

Understanding History to Predict the Future

Chancellor’s book reminds us of the cyclical nature of financial markets. Markets have a history of repeating patterns of boom and bust, often driven by speculative behavior. Money managers should study these cycles and incorporate this historical perspective into their investment strategies. Understanding patterns of financial crises can help in forecasting potential future market downturns and bubbles, thus allowing for timely mitigation strategies.

Prudent Risk Management

The numerous historical cases of financial speculation, such as the tulip mania, the South Sea Bubble, and the dot-com bubble, underline the importance of risk management. The allure of quick profits often leads to excessive risk-taking, ultimately resulting in devastating losses. Money managers should be cautious of such speculative behavior, assessing each investment opportunity not just for its potential returns but also for the level of risk involved. They should avoid overexposure to high-risk assets and ensure a balanced portfolio to hedge against potential market downturns.

Psychology of Speculation

Chancellor’s book emphasizes that financial speculation is often driven by fear and greed—basic human emotions that can cloud rational decision-making. Money managers should understand and account for the impact of these emotional biases on market trends and individual investment decisions. For example, during periods of market euphoria, they should remain level-headed and avoid getting caught up in the hype. Equally, during downturns, they should resist panic selling and rather consider the long-term outlook.

Recognizing Speculative Bubbles

An important lesson from “Devil Take the Hindmost” is the ability to recognize the signs of a speculative bubble. Overvalued assets, excessive public interest, rampant speculation, and widespread belief in a ‘new era’ of endless growth often characterize these bubbles. Money managers can use this knowledge to spot warning signs early, potentially saving their clients from substantial losses when the bubble bursts.

Valuation Fundamentals

Finally, the historical episodes presented in Chancellor’s book underline the importance of fundamental analysis and intrinsic value in investment decision-making. Money managers should place a strong emphasis on understanding the true value of assets and avoid investments with inflated prices that aren’t supported by underlying fundamentals.