How Isaac Le Maire Accidentally Invented Short Selling

[00:00:00]Revenge inspired Short Selling not a need for  market efficiency and liquidity but some say   Short Selling doesn't even do that they say Short  Selling only ever leads to more volatility and   crashes they blame the 2010 flash crash on high  frequency trading and short sellers they say the   2008 financial crisis was subprime mortgages  credit default swaps and well short sellers is   that really true was betting against the market  in the late 2000s the primary reason shareholders   lost $8 trillion even if it did many will defend  it they'd say Short Selling is the best way for   the little guy to stick it to the fat cat look at  gam stop they say Average Joe's pulled a fast one   on billionaires by playing them at their own  game Melvin Capital was one of the prominent   hedge funds shorting GameStop but after getting  trolled by users on the Robin Hood app they lost   around $6 billion before closing their doors for  good that's bad news for the guys at the top but   for the guys at the bottom they feel like it's  Justice being served and it's exactly what Isaac   Lam mer would have wanted he was the guy who  inadvertently created Short Selling when he was   trying to take on one of the biggest companies on  the planet but like many guys trying to gamble on   the stock market he should have quit when he was  ahead in the end he lost everything money Family   honor or did he maybe he did defeat the Dutch East  India Trading Company and other two big defail   corporations he just didn't do it in his lifetime  Isaac Lam mer was a natural born Merchant when he   entered the world in 1558 to 1559 he became  the latest member of a merchant family three   of his brothers were successful entrepreneurs  but Isaac learned the tricks of the trade from   his brother-in-law by the time he was 25 he had  been registered as a successful grer his wealth   and success would eventually be enough to support  22 children that's a lot of nannies to pay diapers   to buy in private education to bankroll maybe  Isaac's early Taste of success inspired him to   franchise his gene pool it certainly seems that  wasn't one to choose a comfortable life clearly   he wanted more even when everything was telling  him to play it safe for example Isaac grew up in   the city of antp in the Spanish Netherlands or  as we call it in the Modern Age Belgium antp was   a vital distribution center for northern Europe  Isaac didn't just have trading in his blood he'd   have it on his doorstep he was so intertwined with  life there that he kep a company of the militia as   a side Hustle by day he was a traitor by night  he was a city Defender at least in theory that   Moonlighting gig Came Crashing Down during  the Dutch Revolt one of the defining battles   of the 80 years war was the fall of antp in 1585  turns out Isaac was better at selling fruits and   vegetables than leading a militia judging from how  the richest most populated city in the Netherlands   went from a rebel stronghold to being captured by  the Spanish He fled from the northern Netherlands   and eventually settled in Amsterdam to raise  a family many would have taken early business   success and a brush with death as a reason reason  to take things easy but Isaac always had bigger   plans he saw how the uprising against Spain and  the eventual establishment of an independent Dutch   Republic was ushering in a new era Whenever there  are borders to be redrawn there is new trade to be   found in the wake of Shifting Tides he founded a  trading company with a couple of business friends   to carry Baltic grains and Timber to Spain from  Russia it was 1599 or maybe 1600 depending on   who you asked the company was called the rebant  company or at least that's what it would be called   once it translated from 17th century Dutch other  items they traded included wax fur and caviar   sought after goods for high-paying customers but  they also held a major position in the fist trade   between British and Spanish ports these premium  Ventures carried risk politically geographically   and commercially but to Isaac there was no risk  without reward and he was right their two voyages   were so successful that the company yielded a  400% return on its investment but even that still   wasn't enough for Isaac to be happy a new market  was opening one that would be even more lucrative   than the trade routes funding the upbringing of  the 22 kids it started with Cornelius de hutman he   made the first successful Dutch expedition to the  East Indies he pulled it off in 1597 when he and   a few other Amsterdam Merchants returned with a  huge cargo of valuables even though this happened   a few years before Isaac's company was formed it's  worth emphasizing how information traveled slower   back then especially when it concerned profitable  spice markets top secret trade routes and Intel   on foreign powers heck back then people didn't  even know these places existed an average person   wouldn't be able to independently verify which  stories were Rumors in hearsay and which were   Bonafide business opportunities in time Isaac  would utilize these channels of communications   to his Advantage but for now let's focus on  how Isaac learned that brave Merchants had   acquired enough Maps expertise and Firepower  to break into the Emerging Market no way was   Isaac Lam mer going to pass up this opportunity  but his decision to go all in had devastating   consequences not just for his bank account in  family but also for the future of economics and   business 500 years after his death so it's time  to learn how history works as we measure the rise   and fall of ISAC La Mer inventor of Short Selling  this week's video is sponsored by War Thunder the   most comprehensive vehicle combat game ever made  now available for free on PC PlayStation and Xbox   and War Thunder you can command over 2500 tanks  planes helicopters and ships from 10 major Nations   ranging from 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high frame rates  even on lower-end machines play War Thunder for   free on PC PlayStation or Xbox by using my link  in the pinned comment or video description new and   returning players who haven't played in 6 months  will receive a massive Bonus Pack across all   platforms including multiple premium Vehicles the  exclusive vehicle decorator Eagle of Valor 100,000   silver lions and 7 Days of Premium this offer is  available for a limited time only so don't miss   out the race was on Britain had already created  its own East Indies Trading Company in 1600 so   Dutch entrepreneurs had to move fast to get a  foothold in the East Indies especially if it was   only matter of time until the likes of Portugal  entered the market trading companies had to   mobilize and fast but there was a problem growth  was impeded by the custom of liquidating a company   after a single Voyage of course some companies  had a few vessels on the books but in general   the practice was used as a form of security or  insurance for the bank rollers so in a bit to Leap   Frog ahead Isaac lamir merged his company with  the same one that had hired cornelius's successful   Voyage this would enable the new company to  mitigate enough risk for a few more voyages   however merging with a reputation as strong as  cornelius's wasn't going to be enough competitors   had also been merging with each other Isaac would  have to monopolize the Dutch industry before he   could even try to take on Britain and Portugal in  the trade Wars thankfully he wasn't the only one   to see where this was going in 1602 Statesman and  revolutionary Johan Von oldin barnavelt set out a   bold idea he'd spent the last few years undergoing  special diplomat missions to King Henry IV of   France and Queen Elizabeth the of England with  his inside scoop on Rival Empires he was perfectly   placed to persuade the six large trading companies  to amalgamate into one big super company the Dutch   East India Trading Company or as it's known by the  Dutch abbreviation the VOC but unlike the British   counterpart it would sell ownership and stock at  Inception by using wealthy investors to grow the   company straight away and not rely exclusively  on state funding the vocc had a real shot at   bringing the idea to scale all they needed was  some rich Merchants with some Naval experience to   buy up some stocks no surprises for guessing that  Isaac Lam was eager to get in on this investment   deal he became the largest shareholder when he  bought 85,000 Dutch gilders worth of stock today   that would be closer to $1.6 million although  something his brother-in-law helped him raise   the full amount he did have creditors and it would  be a fitting way to pay back the guy who got you   into the business in the first place the result  was the vocc was capitalized at four times the   size of the British East India Company when its  21-year Charter was granted on March 20th 1602   it had 6.4 million gilders in the bank adjusting  for inflation that's around $125 million give or   take a couple 100,000 from that point on ISAC air  was one of the most successful merchants on the   planet and the biggest investor of what was going  to be one of the world's biggest companies ever   annual profit started at 6 million gilders which  means Isaac made back his investment practically   straight away the vocc reached its peak in 1799  with stock worth 78 million gilders that's almost   $8 trillion today in fact the vocc was so ahead  of its time that the existence of the first   publicly traded Corporation predated an official  Stock Exchange deals were made with the sellers   and buyers announcing prices and solidifying  trades with hand slaps in high fives before long   commoners were investing in the VOC as the company  grew Isaac lir became a governor in the company   which gave him greater control and insights  into the running of this money-making Behemoth   unfortunately Isaac wanted more or at least that's  the reason the vocc gave for kicking him out we   can't know for sure the exact details because each  side has a different version of events Isaac would   say that the tension with the VOC started with  the Expeditions of vbr Von verbeck in 1602 he led   a fleet of 14 ships in One yacht of the company  directors on board this Expedition one was Isaac   apparently Isaac saw how the malpractice of the  company was affecting the bottom line he had   already been garnering something of a reputation  as a corporate activist by challenging the head   honchos over their poor management and lack of  transparency but something on vibron Voyage was   the straw that broke the camel's back it can't  be verified what he precisely saw that made him   feel like he was losing money but Isaac let his  anger be known in 1609 he filed a petition to   liquidate the VOC in accordance with the standard  business practice in response the VOC kicked him   out his stake in the company and position as  Governor didn't Grant enough voting power to   survive an outing from the board he would argue  that the ensuing litigations were a result of   the VOC not wanting to be held accountable for  screwing investors out of profits he was the   largest shareholder after all so it makes sense  for this to be his motivation however the voc's   version of events is that all these accusations  of mismanagement were phony their version is that   Isaac was caught cooking the books allegedly he  had taken expenses without providing adequate   receipts for example he undertook 14 Expeditions  under his own accounts instead of the companies   which meant any money he pocketed was embezzlement  the sheriff finded him 1,200 gilders about $46,000   which became a strong pretext for the vocc to  expel him not only that but limits were put   on how much of his stock Isaac could take out as  part of the exit deal Isaac signed or was forced   to sign an agreement to not become a competitor  that meant he couldn't run a Trading Company in   the East Indies and certainly not from Dutch  soil he was a merchant banned from trading for   the moment Isaac wouldn't try to find a loophole  because he had another Revenge plan to put into   action his only way to get back into trading would  be to take down the VOC and force it to liquidate   his plan to do this was through a different form  of trading if the whole drama started over stock   value then he was going to make sure it ended over  stock value his idea was simple use the bridge   as a merchant he was familiar with how the gossip  amongst Traders had been a fantastic way to gather   insight and tips this time he was going to use the  back channels against the vocc he hired hoodlums   and set up the Groot company which translates  to large company and sent them to spread   misinformation on the bridge where the stocks  were being traded rumors included things like   boat sinking attacks by British vessels and spices  being ruined by leaks this is the first example of   a be raid because he was specifically targeting  a company to syn the share price lamir and his   Group Company crew sold naked shorts or shares  that they didn't own which put downward pressure   on the VC share price to explain Short Selling  imagine borrowing your friend's PlayStation then   selling it for $400 3 months later your friend  wants it back so you buy it for $300 so you make   a $100 profit naked shorts are like that except  you don't even borrow the PlayStation you just   agree to sell a PlayStation for $400 but promis to  deliver it later then you hope the price drops to   $300 so you can make a Prof profit in this case  lamir promised to sell shares at a certain price   and deliver them at a later date but wanted  to drive the share price much lower so that   when he delivered those shares he could make  the big bucks given all this happened almost   60 years before Isaac Newton discovered gravity  we can cut ourselves some slack when it comes to   the definitions what's important is that by the  time anyone figured out the truth Isaac would   have done enough damage to the company to either  make his money back or sink his Rivals for good   if they'd been stealing from him by overvaluing  the stock then it was only fair that he lowered   their stock price to pocket the difference but  this plan backfired Big Time firstly the type   of investors who'd be on the bridge were the types  of investors who didn't care about the day-to-day   fluctuations of stock value all they cared about  were the yearly payouts the types of shareholders   who might care about day-to-day fluctuations  would be the same Governors who knew the books   well and had the direct lines of communication to  verify rumors still the VOC didn't want to risk   any blowbacks so they announced an early payout  of corn any investor who might be scared enough   to dump stocks was plated with a few ears of maze  so not only had Isaac helped create shareholding   corporate activism and short selling he'd Now set  the standard for dividends to make matters worse   the V sought the government's help when they  figured out what Isaac was up to during their   government petition to ban the practice they said  the real victims of Isaac's conspiracy were not   the fat cats but the widows and orphans who had  invested everything they had into the company it's   it's bad enough having a thieving troublemaker's  reputation but being known as a guy who bullies   widows and orphans dang that was going to sour any  future business prospects the government agreed   with the VOC if only because they had a vested  interest in keeping the company afloat in response   they outlawed naked short sales from now on the  government decreed any speculation against a   company's value needs some proof so now Isaac had  inadvertently created regulation that's not a bad   record for a businessman well unless we count how  it financially ruined him the government ruling   meant everyone became aware of Isaac sheim and  kept away as a result he lost somewhere between   10 and $20 million whatever that is in gilders it  would have been a lot less than what he stood to   lose from the VOC lining their pockets however  Isaac saw himself as a man of Honor even when   he was exiled to a Seaside town he conspired  to take down the VOC once and for all first   he tried to get a freelance gig advising France  on how to set up their own East Indies Trading   Company he knew the infrastructure the corporate  accounting and the merchant trade routes but the   project with the French monarch never got off  the ground maybe France thought the market was   oversaturated or didn't want to risk the Wrath of  the VOC by infringing on their contract with Isaac   in the end Jean Baptist colar found the French  East India Company though it's possible he used   part of Isaac's initial plans Isaac's next Revenge  plot would be his last he set up the Australian   company or at least that's what it would be called  when translated from 17th century Dutch by basing   the company in the united provinces Isaac could  argue that he wasn't breaking his competition   agreement with the VOC at least until the VOC  got some good lawyers but direct competition   wasn't the main objective he knew they were too  big to take on face to face what he wanted to do   is take advantage of the trade routes if he could  find a safe route through the Drake Passage then   potentially he could devalue the entire company's  value in one Fell Swoop that way he would be the   go-to guy for all new trade his son Jacob was put  in charge of the Expedition and ordered not to   conduct any trade when passing through vocc Waters  although this was part of a ruse Isaac knew that   the vocc would question Jacob which gave his son a  chance to sweet talk governor general Gerald rein   re had participated in the earlier Brin company  so would likely look favorably on Isaac's plan   to find a new trade route R's support of his old  colleague might even so descent within the VCC   eventually after a few talks and one marriage  proposal from Jacob to R's daughter the lam   mer expedition was permitted to carry on soon  Jacob successfully discovered a way through the   notoriously dangerous Drake Passage to commemorate  the success he named it Cape Horn but on returning   home the rest of the VOC heard how Isaac had  pulled some strings and found some loopholes   to get through their territory after porting  at Amsterdam Isaac's son was arrested and the   ship was confiscated a legal case ensued between  Isaac and the VOC once again but this time Isaac   won sort of the Court ruled that Isaac was  not breaking any rules by traveling through   the VOC trade routes to get to Cape Horn he also  received a tidy compensation and got his ship back   tragically this was in vain Jacob died during the  return Voyage to make matters worse the voc simply   played Isaac at his own game and moved their own  ships into the new trade routes what else could   Isaac do his new Venture was nothing compared to  the huge Dutch East Indies Trading Company and   now he'd lost one of his children in his Never  Ending Revenge Mission a few years after this   incident Isaac lir died on September 30th 1624 his  Tombstone reads 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 no doubt people   of his time contest that final Point Isaac was  a privileged man who is never satisfied with his   wealth spearheaded the creation of an impressive  Corporation and even resorted to playing dirty   tricks when he got bitter his Grudge cost him  Fortune reputation and the lives of countless   people including his son but some say Isaac did  Die With Honor despite his misgivings sacrifices   and mistakes he created business practices and  principles which protect everyone today from   Average Joe's investing in companies to Regulators  holding Boards of directors accountable they would   say he was framed by the VOC when he saw them  lining their pockets it was surely the VOC who   robbing widows and orphans through that lens Isaac  spent his life trying to break up a monopoly and   advertently created new trade routes and even  helped form vital legal Frameworks to reign in   and punish corporate misbehaviour so sure maybe  his invention of Short Selling did centuries   later contribute to Market crashes but it was  also his sense of fairness and honor that gave   normal people the tools to stick it to the  fat cats again thank you to War Thunder for   sponsoring this video don't forget to play  for free on PC Playstation or Xbox by using   my link in the pinned comment or video description  new and returning players that haven't played in   6 months will also receive a massive Bonus Pack  across all platforms including multiple premium   vehicles and other goodies available for a limited  time only so make sure not to miss it now there   are two sides to every story and if you want to  hear the side of the VOC make sure you watch our   video on that as always don't forget to like And  subscribe to keep on learning how history works