Episode 598: That Time We Shorted America, Part Two : Planet Money Everyone said betting against the entire stock market was a terrible idea. We did it anyway. Today, we find out the results, and revisit the first short ever done in the 17th century.
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Episode 598: That Time We Shorted America, Part Two

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Episode 598: That Time We Shorted America, Part Two


This is PLANET MONEY from NPR. I'm Nick Fountain. We are running two great shows that we first ran back in 2015. This is the second. On the first, we made a bet against the entire American economy. It's a little hard to explain. If you haven't heard the first episode, you might want to go take a listen. Today, we are going to reveal the results of that bet that Robert Smith and David Kestenbaum made back in 2015. Here's the episode.


DAVID KESTENBAUM: If you heard the last show, you know that we here at PLANET MONEY decided that we wanted to experience firsthand what it was like to short something - to bet against something. So you've probably heard about shorting - you know, sometimes people short individual stocks they think are going to tank. We went big. We shorted the entire stock market - what one expert called the Armageddon trade.

ROBERT SMITH: Yeah, the way we put it is, we shorted America. We bet that the stock market would go down.

KESTENBAUM: It's a funny feeling, listening to the news when you are short the entire stock market 'cause everyone else's good news is your bad news. You feel like you're on the opposite team as everybody else. It's like being a Red Sox fan living in New York City or something.

SMITH: You feel alone. Yeah, it's hard to even have conversations about the world. Someone's like, hey, you hear the stock market's way up? And you're like...


SMITH: ...Yeah, that's great. That's great for you.

KESTENBAUM: Great for you.

SMITH: I'm really happy.

KESTENBAUM: (Laughter) Turns out, of course, we are not alone. There are other short sellers out there - a relatively small number - and there have been throughout history, going way, way, way back.

SMITH: Hello, and welcome to PLANET MONEY. I'm Robert Smith.

KESTENBAUM: And I'm David Kestenbaum.

SMITH: Today on the show, the story of one man who, as far as we can tell, was the very first short seller - the very first person to bet that an individual stock would go down.

KESTENBAUM: It doesn't go well for him.

SMITH: Nope. And we are going to bring to an end this little experiment of shorting the stock market. We will tell you how we did.

KESTENBAUM: Not very well.

SARAH GONZALEZ, BYLINE: If you haven't been reading Planet Money's newsletter, you're missing out on stories about hidden beaches and scooter mania and plastic bag bans. It's just the right amount of economics and analysis served up once a week. Subscribe at npr.org/planetmoneynewsletter.


KESTENBAUM: The first person to short a stock was apparently this guy named Isaac Le Maire. He lived almost 400 years ago, and his story survives because he lived in the Netherlands in Amsterdam. And the Dutch wrote a lot of stuff down.

SMITH: Now, we don't speak Dutch - definitely not old 17th century Dutch - but we got some help.

LUDWIJK PETRAM: My name is Ludwijk Petram. I'm an economist and historian from the Netherlands.

SMITH: Ludwijk told us there are really only barely enough scraps to piece this whole story together. But from what survives, Isaac Le Maire seems to have been a guy who, when he did something, he went all the way. He went really big. For instance, he had 22 children.

PETRAM: Which is - wow - quite something special. He obviously was very wealthy. I mean, if you can support 22 children, well, you have to have a lot of money.

KESTENBAUM: No portraits of Le Maire survive, but Ludwijk says in his mind, he always imagines a trim guy dressed in the style of the day - wool clothes, maybe a cape and a very big, wide collar.

PETRAM: That's what I imagine him wearing, but what his face looked like - well, we'll never know, I'm afraid.

KESTENBAUM: No references to a giant mustache or anything.

PETRAM: No. Sorry. (Laughter).

SMITH: So that's the man. Now, for the stock, the company he would eventually short. Back in those days, there were not a lot of choices.

PETRAM: At the beginning of the 17th century, there was only one stock. It was the first stock, you know, so it's obvious that there was only one.

KESTENBAUM: That's right. The first short was on the very first stock. The company is one that you may remember from high school history class - the Dutch East India Company. Think big wooden boats, pirate ship-like things with big sails making very, very dangerous trips across rough seas to about as far as you can go from the Netherlands all the way to what today is Indonesia. And remember, this is the 1600s - 400 years ago. People died at sea all the time.

PETRAM: Many ships didn't return.

KESTENBAUM: And what were they risking their lives for - to bring back?

PETRAM: Spices - pepper, also nutmeg, mace.

KESTENBAUM: Robert, I remember hearing about the spice trade in history class. And I didn't think much about it 'cause, you know, it was, like, a long time ago. Everything always seemed kind of weird. But it wasn't until we did the story that I really tried to imagine a world where everyone coveted spices. Was it like, hey, I got some nutmeg. Come over. I'll cook you dinner. Apparently, yes, that is what it was like.

PETRAM: It's amazing, but people really liked to cook with them. I've seen recipes from the 17th century, and they used huge amount of nutmeg and pepper in recipes.

KESTENBAUM: He sent me a chicken recipe. It does have a ton of spices. It seems like it would be almost inedible.

SMITH: Now, when we say that this is the first company, we mean the first company that resembles what we have today - a company that issues stock so that anyone - not just, you know, rich guys who built up a company - but anyone could own a small piece of the company. If you owned one of these shares, you owned a part of the Dutch East India Company. If those ships made it back with holds filled with nutmeg and pepper and mace, a part of the profits were yours.

KESTENBAUM: The legal details of what it meant to own one of these shares were laid out in this giant book called the "Capital Subscription" book, with the names of all the first shareholders. The book still exists today, though Ludwijk told me it is so historic that if you went to the archives and asked to see it, they would tell him no. But its pages have been photographed. And we asked Ludwijk to read the very first sentence.

PETRAM: OK. (Speaking Dutch).

KESTENBAUM: I'm going to skip ahead a full 30 seconds here.

PETRAM: (Speaking Dutch). But this is not even one sentence. I...


PETRAM: I thought, well, maybe this is enough.

SMITH: I recognize the words - I recognize the word commerci (ph) in there.

PETRAM: Yeah, commerce.

SMITH: And esperanza - hope?

PETRAM: Yeah, that's the Cape of Good Hope.

SMITH: This book contains this little line, which seems almost like it was an afterthought. It says, shares - shares of stock in the Dutch East India Company - may be transferred from one person to another.

KESTENBAUM: And this sentence is the beginning of four centuries of craziness. It is the birth of what we now call a stock market. At first, only a few shares trade hands, but then it catches on. And the first stock exchange just kind of naturally forms.

SMITH: Not in a building - it happens on a bridge. And it's this bridge in Amsterdam where merchants gather to do their business. They sell grain, wine, beer, timber. And all of a sudden, there was this new thing that they could sell. And so people gravitated to this marketplace, and they start selling this abstract item that no one had ever seen before - a stock, ownership shares in a company.

KESTENBAUM: There is a description from a little later in history of how the trading might have actually gone. It's from a book called "Confusion Of Confusions," which was a kind of drama written about the stock market. To negotiate a price, one guy would put his hands out, palms up, and shout out an offer.

SMITH: And then someone would shout out a counteroffer, and then they'd do something which I don't know if you see today in a stock market anywhere - you would then slap the guy's hands.

PETRAM: So there was this hand slapping, you know - so people shouting prices and another man coming in between and shouting another price. And this just went on until they got to an agreement.

KESTENBAUM: So it's like an elaborate game of patty cake. It'd be like - they'd shout something, shout something, shout something, shout something, shout something. And then they'd shake, and it'd be done.

PETRAM: That's it.

SMITH: Ludwijk says the traders would stand around while they're doing this, and they would talk about the news of the day. Oh, I hear England's building more ships. And that might push the share price down. It's kind of like CNBC today, except imagine at the bottom of the screen a very short stock ticker.

KESTENBAUM: 'Cause there's only one stock.

SMITH: There's only one stock (laughter).

KESTENBAUM: So back to Isaac Le Maire, the first short seller - the guy who winds up betting against the Dutch East India Company. As is sometimes the case in stories like this, Le Maire started out on the other side entirely. He began as an insider. In fact, he was one of the directors of the Dutch East India Company - one of the founders. And he became embroiled in some sort of dispute with the Dutch East India Company. The details are unclear. Some surviving documents make it look like it might have been over expense receipts. Le Maire, as one of the directors, often had to use his own money to build or outfit one of the new ships. And there was some question, apparently, about some of Le Maire's receipts.

PETRAM: Something must have gone wrong with Isaac Le Maire, but we don't know if it was a quarrel about a lot of money or if it was just a small amount of money. We just don't know. But we do know that he was - how do you say - he was forced out of the Dutch East India Company, and he was also forced to sign a document which said that he would - he promised that he would never again be involved in any kind of trade with the East Indies.

KESTENBAUM: That sounds pretty serious for a dispute over receipts.

PETRAM: Yeah, but money was a serious business for these people. I think it basically was their life.

SMITH: Word of the scandal spread, and it began to affect every aspect of Le Maire's life, even his church. His church turned against him. They banned him from one of the holiest of ceremonies.

PETRAM: Once in a year, they have, like, the Last Supper. And Isaac Le Maire wasn't allowed anymore to participate in this ritual. That's a serious punishment.

SMITH: So this must have been upsetting for him. Basically, the Dutch East India Company is calling into question his business ethics. His church is excluding him.

PETRAM: That's right. So that was about all he had, right?

SMITH: Plus, it's a small town, and everyone knows.

PETRAM: Everyone knows. Everyone knew Isaac Le Maire back then. He - I mean, he was one of the directors of the Dutch East India Company. There must have been gossip in all the inns of Amsterdam about what had happened and what is he going to do now.

SMITH: What he was going to do would make history, and not in a good way. Le Maire plotted his revenge. He hatched a plan to take down the Dutch East India Company and, even better, make money for himself at the same time by placing a bet that the stock price would go down. He would become the world's first person to short a stock.

KESTENBAUM: The bet itself - the short - was actually fairly easy to do. Amazingly, Amsterdam back then had a kind of rudimentary futures market for things like grain. If you wanted to bet that the price of grain was going to go down in the future, you could do that. So that is basically what Isaac Le Maire did - not with grain, but with shares of the Dutch East India Company.

For finance nerds out there, here is exactly what he did. He sold futures contracts guaranteeing that he could sell the stock at the current price at a time in the future. If the stock dropped in value before then, he could buy it cheap, sell it at the price agreed to in the futures contract and make money. Is it fair to call this the first short of a stock?

PETRAM: Oh, sure. Yeah. Yeah. Certainly.

SMITH: Now, Le Maire couldn't step out on the bridge and do this himself. I mean, remember, he was a former director of the company. People might figure out what he was up to. So he had a bunch of what Ludwijk calls henchmen go out and do it for him.

KESTENBAUM: And betting against something was fine. People didn't have a problem with that. It was what he did next that really got him in trouble. His henchmen started spreading rumors, trying to drive the stock price down.

PETRAM: They said things like, oh, we heard a ship sunk somewhere off the coast of Cape of Good Hope or something, or, we heard that there's a ship with a load of pepper off the coast of Portugal right now, but there's some leakage in the ship, you know - sort of the peppers are really bad quality - stories like that.

SMITH: Today, if these kind of rumors were spreading around, I'm sure the company would send out a press release that the director...

KESTENBAUM: No, the head of PR would start tweeting like crazy.

SMITH: Yeah. That is not true. These rumors are unfounded or, you know, the captain of the ship would be on CNBC satellite hookup going like, nope, been down to the hold - pepper's fine.

KESTENBAUM: Back then, financial information moved more slowly. How long would it take you if you wanted to fact-check one of those rumors?

PETRAM: We had sent a ship to East Asia that would take you eight months and then eight months back. So that's 16 months in total.

SMITH: (Laughter).

PETRAM: But of course, you could try to send a letter to Portugal and ask, have any of the Portuguese ships heard anything in - about this or that rumor? That would take a little bit less long. But could you trust some Portuguese information?

KESTENBAUM: I mean, today, it's, like, milliseconds, right? And back then, it was months.

PETRAM: Yeah, it's incredible, right?

KESTENBAUM: The stock price began to drop. The Dutch East India Company knew it had to do something. It needed a show of strength. It needed to reassure investors somehow that things were fine. So it did what any company today might do.

SMITH: The Dutch East India Company said to every one of its shareholders, we are doing so well, we are going to give you a special bonus.

PETRAM: They instantly announced a dividend. It was the first dividend of the Dutch East India Company. And what happened - I mean, it wasn't really a great dividend. The shareholders of the Dutch East India Company were allowed to collect a certain quantity of mace at one of the Dutch East India houses in the Netherlands. So they...

KESTENBAUM: Oh, the dividend wasn't money. It was like, here, you can come...


KESTENBAUM: ...Have some of the spices we brought home.

PETRAM: Yeah. Yeah. Yeah.

SMITH: Bring your own bucket.

PETRAM: Yeah, you bring your own bucket. They hadn't any cash at the time, and they must have thought, what do we have? What can we distribute to our shareholders? And - oh, we have a bunch of mace here. Let's say that they can collect a quantity of mace from us.

KESTENBAUM: The company also - as companies today will do when they're upset with short sellers - argues for a ban on short selling. The Dutch East India Company writes a letter to the government, saying short selling was hurting society's most vulnerable people - widows and orphans.

PETRAM: And their reasoning is that there was a large number of widows and orphans who had invested all their money in the Dutch East India Company.

KESTENBAUM: Is that true?

PETRAM: Well, there was - there were maybe a few widows and orphans. So...

SMITH: So they were fighting back with the same sort of weapons. They were fighting back with rumors and innuendo.


SMITH: Yeah.


SMITH: Love it.

PETRAM: That's right.

SMITH: The Dutch government did issue a partial ban on short selling, and Isaac Le Maire was barred from accessing any of his shares. His plan to short the company was a total failure. According to one historian, Le Maire and his henchmen lost what today would be 10 or $20 million.

KESTENBAUM: Le Maire eventually left town - basically went into exile. And he took up residence in this small village near the ocean. Ludwijk has been there. He says it's pretty, but for Isaac le Maire, it must have seemed dreadfully dull. The only surviving document known to be written by Isaac Le Maire is this letter to the mayor of Amsterdam, asking for the financial restrictions on him to be lifted. It mentions that he's been an upstanding member of society, mentions his 22 children. But his request is denied. And he dies there in this little town.

SMITH: The writing on his tombstone kind of sums it all up.

PETRAM: (Foreign language spoken).

KESTENBAUM: I'll do the translation. Here lies Isaac Le Maire, a merchant for more than 30 years, blessed by the Lord. He gained a lot of money and lost it all, except for his honor.

PETRAM: (Foreign language spoken). The sad thing, of course, is that he was probably the only one who was convinced that he actually kept his honor because all other people, well, found him a disrespectful man.

KESTENBAUM: Quite a thing to put on your tombstone.

PETRAM: It certainly is.

KESTENBAUM: Very long.

PETRAM: Very long, also. Yeah. Yeah. Yeah.

SMITH: Isaac Le Maire's short would have eventually paid off. The Dutch East India Company collapsed, but only after a really long time - 175 years later.

KESTENBAUM: Timing is everything.


FOUNTAIN: After the break, we'll hear how Robert and David did in their crazy bet against America back in 2015.


STEPHEN PEARSON: Thank you for calling E*TRADE Financial. This is Stephen Pearson. How can I assist you today?

KESTENBAUM: I called back Stephen Pearson at E*TRADE, the guy who'd helped us short the stock market back in January.

PEARSON: Hey, David. How are you doing there?

KESTENBAUM: Good. And nice to talk to you again.

PEARSON: Yeah, same here.

KESTENBAUM: It's been a great - what is it? - 6 1/2 weeks for the stock market, huh?

PEARSON: It has been.

KESTENBAUM: Can you actually look and see how much the stock market has gone up since we did this?

PEARSON: Yeah, let's see. So yeah, I think we're at almost 6%.

KESTENBAUM: Up the stock market.

PEARSON: That - correct. Yeah.

KESTENBAUM: Which is bad for us.

PEARSON: It is bad for the trade.

KESTENBAUM: (Laughter) All right. Well, I think it's time to end it.

PEARSON: All right. Well, we'll get you out here. We currently got...

KESTENBAUM: Robert, you want to know how it all shook out?

SMITH: I do.

KESTENBAUM: We had invested about $400 dollars shorting the stock market. Because the stock market went up about 6%, we lost about 6%, which was 22 bucks.

SMITH: But there's more.

KESTENBAUM: Yeah. If you add in fees - you have to pay to do the trade - we lost more. We lost a total of $42. That would be a negative return of about 10% on our investment.

SMITH: A negative return of 10% in just six weeks.


SMITH: You're fired.


SMITH: I'm sorry, but you are no longer our money manager.

KESTENBAUM: Let's give it to Stacey.

SMITH: We'll give it to Stacey next time. Was there at any point a moment at which we could have traded out of this short and made money on this?

KESTENBAUM: Yeah. The best time would have been if we'd gotten out on February 2 at 10:06 a.m. and two seconds. The market was down a little bit then. We could've made about four bucks before fees.

SMITH: Oh, before fees. So we would've lost money no matter what.



FOUNTAIN: If you like the show, do us a favor. Leave a review on Apple Podcasts for PLANET MONEY. Also, we need your advice. We still have this investment fund. I have it right here. It literally still has an IOU from David Kestenbaum for $406, and he doesn't even work here anymore. David, send us that money.

While we're waiting for David's money, we are taking your suggestions. What should we invest in next? Let us know on Twitter or Facebook. We're also on Instagram, or you can email us - planetmoney@npr.org - though we are not going to invest in bitcoin. I'm just telling you right now.

Today's show was produced by Jess Jiang originally. The rerun was produced by Rachael Cohn.

KESTENBAUM: I'm David Kestenbaum.

SMITH: And I'm Robert Smith.

FOUNTAIN: And I'm Nick Fountain. Thanks for listening.

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