4 Historical Investing Lessons From Ancient Rome
After having traveled to the region, we should consider what Ancient Rome can teach us about things. Here we discuss trading so we should look at what lessons it holds for us. These lessons could all be learned elsewhere but that is no fun. The stock market is full of historical analysis so let's apply that here.
Organization is Critical to Success
Rome was not victorious by being a disheveled mob of soldiers charging against the enemy at a whim. They had proper tactics.
Early in the Republic, this was modeled after the Greek example delivered via the Etruscan rulers of pre-Republic Rome. The Greek phalanx was effective in frontal combat against slow foes, but it suffered from being slow easily maneuvered around and struck in the back. Rome was being beaten by a more mobile military formation, and adopted this as their own. They defeated the very enemy they took the formation from. Their formations and military organization expanded the Republic and build the Empire.
Two important lessons are learned. First, stay organized with strong rules. Follow those rules, because playing cowboy with your own rules is folly. However, remain flexible and adopt changes when necessary. This does not mean fly by the seat of your pants, but have a strategy and stick to that even if it is different from what you used before. Roman formation did not have to change because they kept winning. It was a clever commander that changed strategies when they proved ineffective. It was folly to adhere to tactics when they were inappropriate and led to many failures.
Companies Will Expand Until it is Inefficient and Mask Inefficiency by Further Expansion
Rome expanded and expanded, giving rise to a major border and coming up against all sorts of people who did not like them. Not only that but they became very numerous as time passed by. Absent absolute control the border was too large and there were too many people not under the yoke of the Romans.
Companies seek to grow and expand. They are punished if high earnings stay high and do not grow higher. That leads to more and more acquisitions. Once a glorious company sees margins eroding it does even more purchases to seem like it doing something to return to the great days of old.
Rome used conquest for glory and to take people's mind off of things. It also used it to plunder far off lands for money hoping to reap reward beyond that plunder by conquering territory. Rome was notorious for taxing conquered or otherwise gained provinces like rich Asia, which is now the area in and around Turkey. When it was not successful in making enough money to satisfy the rich men back home they had to conqueror yet more territory. Reputations were made by bold action, just as now they can be made through bold acquisition . Once companies are grasping at straws it might be time to avoid them or look for downside gains.
Devaluation Will Occur in Harsh Times
Rome debased its currency often. It would put less precious metal into its coins when it needed to. When facing problems regarding dwindling balances you can devalue yourself by selling off more pieces of the same whole. A company can issue more shares or do private placements. Rome debased currency most often to pay its professional army once it moved to a volunteer force instead of conscripted farmers. Companies can pay their employees a lot of stock options, which adds to the number of shares available hurting all shareholders.
Luckily employee stock options are not usually enough to hurt the overall value of shares. On the other hand handing something valuable to a man like Marcus Crassus in exchange for money can lead to problems down the line. For an influx of capital you give up all plunder and land to a rich man like Crassus or large investment pools. Preferred shares that can be converted to common stock resemble this. Whenever capital is needed a way will be found even at the cost of current loyalists, or shareholders. The metaphor is getting a bit contorted, but dilution occurs especially with penny stocks. A subtler form of dilution occurs with the respected members of the investing world. Preferred shares with high conversion ratios fit the bill.
Everything Falls
Rome fell. Nothing has permanence. It is just a fact of reality. Rome was not even the same at various stages. The early Republic was not like the corrupted Republic of Marius and Caesar's time. The Empire was different depending on who was ruling. Greatness is not permanent. Companies that are forever stocks have felt the sting of time, and though they may have managed to reinvent themselves it is just part of their cycle and the end is most likely on its way.
Some companies go out of business. Think about all the companies that have gone out of business. Or think about companies at the height of their age just treading water. They may have been rock stars once, but now they are no longer the leaders of the pack.
For a technology company it can mean the end through irrelevance. Think about the unassailable Apple (AAPL), it could rise again but it has been rendered mortal. It is not a stock with only one direction. It did not reach a trillion dollar market cap before pulling back. It could soar again, but how long till the next fall.
That all things fall is probably the best argument in favor of trading, though Rome took a thousand years. Companies tend to fall faster, though some can change enough to go on.
Trading is a way of extracting value while you can. Holding long-term can work, but not indefinitely. Eventually you need cash in hand.
Courtesy of Timothy Sykes, timothysykes.com