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The stamp of the stampede - A cautionary tale.

How a stampede into stamps by a tight circle of ‘well informed’ people turned a frenzy into a tepid shallow pond of despondency.

During the early 2000s when I first moved to Barcelona I encountered a lawyer who helped a lot of wealthy local people – real old money families – at a dinner party. We will call him Jordi in order to respect his privacy & that of his clients. He told me a story which has stayed with me since as it serves to illustrate the dangers of groupthink & illiquid markets very well.

As the late 1990s turned into the new millennia the Barcelona economy and the property market really started to take off and skyrocket as the median house price went from Euro 240,000 in 2003 to close to half a million by 2006. Many of the families who had owned large swaths of downtown Barcelona & the surrounding area for decades suddenly found themselves not just well off but rather wealthy and tempted to cash in as big institutional and international players came in powered by easy money and offered amazing deals.

Upon the exit and now suddenly not just cash-flow wealthy from rents but outright cash rich, and faced with a new reality after many decades of having their wealth tied up in real estate and local business ventures they were faced with new choices – perhaps too many choices and information overflow but little real understanding.

This group was in many cases interconnected as the families had been doing business together and socialised for decades, it was also an insular, tax adverse and in investment terms relatively unsophisticated group.

One of the thought leaders in the group became convinced that the optimal solution was to seek the protection of a private niche market of tangible assets that could be easily moved across borders and handed down to family as part of legacy transfers and traded away from prying eyes in a private marketplace – The answer was stamps.

Armed with the knowledge obtained from some sales materials and a few books on the matter he went looking for local dealer in order to secure a private and local avenue to convert some of his new found wealth into these amazing new vehicles for instant wealth protection with major major upside potential.

Through a friend of a friend he found a suitable place, it was a rather sleepy organisation that had mainly been catering to a few hobby collectors and some business at international fairs around the backwaters of Europe. It was suddenly turned into the ‘new new thing’ for a group of recently very wealthy people. With the help of a friendly banker an easy private format for turning all that cash into something; “Safer than houses and easier to move around the world than gold” with absolute anonymity came into being, making the owner of the sleepy stamp shop a wealthy and sought after man in the process.

Soon a mini mania was under way as these families bid up the prices of these scarce assets in both a competition in terms of who could own the most prestigious items as well as who could get the most ROI.

Soon the dealer was running out of stock and as the group valued privacy and was not particularly internet savvy, he had a monopoly on this exclusive and lucrative business and so he set out to acquire new stock from some of his contacts around Europe, and soon he would be returning with more and more exotic options for his clientele much to their delight.

At some stage as a brisk re-sale market within the circle came into being and prices and demand kept rising, he decided to partner up with one of his international contacts who was instantly attracted to this lucrative opportunity and who he brought new supply to the market.

This new partner was more commercially informed and quickly added rocket fuel to the flames with grand tales, private events & fancy materials and soon most of the wealth from selling downtown Barcelona was converted into a few allegedly well stocked stamp collections tucked away in safe deposit boxes in Andorra and in private homes in the best parts of town.

As the cash from the sales of properties dried up and they ran out of new people to bring into the ‘circle of trust,’ combined with increasing spending habits of these suddenly very wealthy people, led to this once deep and exclusive market all too quickly becoming a shallow narrow puddle of despondency.

Or as Jordi described it in painfully visual terms;

“It was like Buffets saying - when the tide goes out we all know who has been swimming without swimming trunks but in this case it was more like a small group of middle-aged swingers getting into a Jacuzzi with the lights dimmed and Champagne flowing feeling like the gods of Olympus and now hours later someone pulls the plug and switches on all the lights and all that is left is a small group of naked old people sitting cramped in a Jacuzzi with no water and only some leftover foam and drain hair for company. Whoosh the liquidity has gone and so has the good times…”

The international supplier promptly decided to move on and left with the majority of the cash leaving everyone else “asset rich” on paper but cash poor.

In 2006/07 I thought of this story, as tales of Wall Street investment banks’ escapades in private market investment vehicles and dark pools did the rounds and as we saw the unraveling of a global narrow, opaque game of three-card Monte AKA CDOs & their kin, began to take hold.

I think of it now when I see some of the developments in the ICO “markets” and the so-called private markets underpinning the stratospheric valuations of the tech unicorns.

It serves as a great reminder of the general psychology of markets, the dangers of groupthink, confirmation bias & illiquid markets. When a lot of people jump into a small pool it may appear as if the water is rising and floating all boats to a ‘permanently higher & higher plateau.’ Caveat Emptor.

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