Back in 1720, the English made a remarkable discovery: You could raise money by selling stock and never have to pay it back.
The English were fighting in the War of Spanish Succession, and needed money to finance the war. To do so, they created the South Seas Company, which gave the company a monopoly on trade with South America. Visions of Inca gold danced in English heads, and the shares immediately rose to 10 times their value.
What was particularly interesting was the flurry of stock offerings that followed in its wake. One company promised to make square cannon balls. My favorite offering was “For carrying-on an undertaking of great advantage but no-one to know what it is!!” It raised £2,000 pounds, an extremely large sum for the day.
![](https://johnmwaggoner.wordpress.com/wp-content/uploads/2019/09/robinson_crusoe_1719_1st_edition.jpg?w=618)
One problem with the South Seas Company was the English had very little trade with South America, and even smaller odds of getting much. Daniel Defoe, known mainly now for writing Robinson Crusoe, commented:
“Unless the Spaniards are to be divested of common sense, infatuate, and given up, abandoning their own commerce, throwing away the only valuable stake they have left in the world, and in short, bent on their own ruin, we cannot suggest that they will ever, on any consideration, or for any equivalent, part with so valuable, indeed so inestimable a jewel, as the exclusive trade to their own plantations.”
Eventually, most of these companies, including the South Seas Company, collapsed, taking investors’ money with them. All of which is a long way to talk about the recent spate of initial public offerings and, to a lesser extent, junk bonds. For an investor, the thing to remember about both is that Wall Street is selling, and Wall Street rarely gives away bargains.
Consider WeWork, purveyor of flexible workspaces. The company filed for its initial public offering, which they valued at $47 billion. Briefly. A month later, the company was valued at $10 billion, and then delayed its IPO immediately.
WeWork had a plenitude of problems, including an erratic CEO who charged the company $6 million for the “We” trademark. (He later paid it back). More importantly, WeWork was a massively money-losing proposition. Although revenue grew impressively, so did losses. Even Wall Street couldn’t sell that one.
In the junk-bond market, Bloomberg reports that four companies have pulled their junk offerings this month, and that a number have been forced to accept higher rates or dangle other sweeteners to get the deals done. In an era when the 10-year Treasury note yields 1.72%, selling bonds at an average 4.59 percentage points higher yield shouldn’t be that tough.
If you’re tempted by an initial public offering, remember the rule of thumb: Don’t. Most times, the stock price will sink after about six months, and you can get the stock at a better price. (This excludes the lucky devils who owned the stock before the IPO; they usually get a tremendous profit, thanks to fine folks like you.) Junk-bond yields aren’t particularly low or high at the moment. Just remember that the junkiest ones disappear when the economy falters.