Four hundred years ago, Isaac Le Maire bet that the price of a stock would go down.
Today this happens all the time.
You’ve probably heard of it — it’s called short selling.
But 400 years ago the stock market consisted of one stock,
and the price of that stock
almost always went up.
This is the story of why Le Maire bet against it and more or less invented short selling.
The story starts at the Dutch East India Company.
Le Maire was one of the founding directors.
He seems to have been a guy who, when he did something, he went all the way.
He had 22 children, and he could afford them
because the Dutch East India Company was wildly successful.
You might remember hearing about them in middle school.
They made a ton of money in the spice trade.
Back then they’d go out in their wooden ships and bring back spices.
People at the time loved spices.
Pepper, mace, nutmeg — anything they could get really.
Spices were such a phenomenon that rich people would use way too much
just to show that they could afford it.
Spices were a good business to be in.
One of the remarkable things about the Dutch East India Company was it was the first business
to ever issue stock in the modern sense.
Anyone could own a small piece of the company.
Not only that; you could transfer your shares to somebody else.
That idea four centuries ago was the birth of what we now call a stock market.
Shareholders would gather on a bridge in Amsterdam to exchange stock.
To negotiate a price, one guy would put his hand out, palm up, and shout an offer, and
then someone would make a counteroffer.
They'd slap their hands and then slap them again and again.
Someone at the time said their hands would redden from the blows.
Meanwhile, the traders would stand around talking about the news of the day.
You know — "Oh, I hear England’s building some more ships."
"Huh, that's, like, more competition for the Dutch East India Company.”
These sort of conversations played a big role in the price of the stock.
Le Maire would eventually use this to his advantage.
The story of the first short sale really starts in 1605,
when Le Maire was kicked out of the Dutch East India Company.
It’s not totally clear what the issue was,
but it seems like it had something to do with expense reports.
Seems like he might have filed for a bit more than he was owed.
In any case, he was forced out.
He had to promise that he would never again be involve
in any kind of trade with the East Indies.
This was a big deal back then.
Word of the scandal spread and affected every aspect of his life.
He was ruined.
So, he set his mind to the only thing he had left: Revenge.
He hatched a plan to knock the Dutch East India Company down a peg —
and to make a fortune for himself.
His plan had three steps.
Step one: Find and hire some henchmen.
Step two: Le Maire told the henchmen
to make a bet that the price of the stock would go down.
That was it — the order for the world's first short sale.
If the concept is still a little hazy, here's exactly what a short sale is.
Short selling is when an investor, predicting that the price of a stock will go down,
borrows shares and sells them today and buys them back in the future,
pocketing the difference.
Once his henchmen understood, he had them take it one step further.
He directed them to go out and purposely manipulate the stock price by spreading rumors about
the Dutch East India Company.
They’d say things like, “Oh, we heard a ship sunk off the Cape of Good Hope,
or something.”
And it worked.
The prices started to go down.
When the Dutch East India Company heard about this, they knew they had to do something.
They needed a show of strength.
So, they announced the company’s first dividend.
Basically, they decided to share some profits with their shareholders.
But not in the form of money.
They said to every one of their investors, “We are doing so well, you can go out to
our storage and get some corn.
Bring your own bucket.”
And then the company went to the government and argued that short selling should be banned.
They said it was "hurting society’s most vulnerable people, widows and orphans who
had invested all their money in the company stock."
It worked.
The government sided with the Dutch East India Company.
Word finally came through to Le Maire.
Not only had the government issued a partial ban on short selling — Le Maire was barred
from accessing any of his shares.
His plan to short the company was a complete failure.
According to one historian, he lost what today would be $10 million or $20 million.
Once again, he was ruined.
Le Maire spent the rest of his life in exile in this seaside town.
He dedicated himself to trying to break the trade monopoly of the Dutch East India Company.
But he never did.
He eventually died in 1624, and the writing on his headstone kind of sums it all up:
“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.”
The part about his honor seems kind of questionable.