It’s very easy to overemphasize your losses when you’re investing, which inevitably erodes your confidence, makes you overanalyze things and then results in more losses. I personally believe that what I do only works if I’m simultaneously passionate and detached. It’s all ultimately looking at a situation, deciding whether the market is discounting it too heavily or not enough and then making a decision. Emotion doesn’t really fit into that equation beyond analyzing the emotions at play in said discount.
But, like Sisyphus if his boulder occasionally blew up and caused global recessions, financial risk takers are doomed to ultimately learn new and interesting ways to make the same mistake. The best we can do is minimize our inevitable boulder-rolling-down-the-hill moment. For me, the remedy to falling into this trap is to make my wins tangible.
”Uh, Citrini…”, you might say, “aren’t they already tangible. You know…the money?”
Yeah, I guess. Sure. But not really. Those are just numbers on a screen. Any relation they have to the other numbers on a screen that earned them is ephemeral at best. I want something I can touch and see as a reminder that I’m not an idiot. Or, at least, that I’m an idiot who sometimes produces reasonable insight into what markets think will happen and why they’re wrong.
So, about two years ago I began memorializing trades that I felt really, really killed it or demonstrated some sort of invaluable lesson it would serve me well to remember regularly. I have a wall and on the shelves are mementos, mostly antiques or curios, that remind me of times when I wasn’t stupid. It’s useful when I’m currently being stupid and need a reminder of how not to do that.
This process dovetails nicely with my fondness for financial history and penchant for falling down internet rabbit holes. I find myself reading one day about some incident in financial history and I say “hey, that’s kind of like the time I caught that 3x move in an Indonesian coal company” (I’m good at convincing myself of these kinds of things). The link is typically tenuous at best but what are you gonna do.
Also, antiques are valuable and can be easily resold to raise funds if this type of hubris comes back to bite me and I need to skip town fast.
Kidding! …I have enough money squirreled away to skip town without having to sell anything.
Because I do trade rates & bonds somewhat frequently and the easy way to commemorate that, obviously, is antique bonds, I’ve got a bit of a collection going. After I closed out a Buxl short I’d held since early 2022, I bought a very cool Weimar Republic Young Loan bond. It seemed apropos - classic german inflation bond to remember the time German bonds went down because of inflation. Some of them are more creative than that, I promise.
An example of a nominal Weimar bond for 1,000,000 marks. Young Loan USD Bonds were issued denominated as gold in dollars to ensure that hyperinflation didn’t devalue the lender’s principal, and in the restructuring the currency used were actually mortgage backed securities - since government backed currency was worthless.
This brings me to my most recent addition, commemorating my basket of pre-revenue deSPACs in 2021/2022 that went down roughly 80% from peak to trough.
Yes, I have acquired a bonafide, genuine, 100% authentic Poyaisian sovereign bond. Poyais has such a rich history and as a country is truly inspiring to me because of…
In the sense that they existed, and their issue was subscribed and then they defaulted because they were obligations of a country that doesn’t exist, the bonds were real.
Indeed, the entire country of Poyais was a massive fraud, perhaps the largest ever perpetrated. A heady mix of low interest rates, hype surrounding the new world and a very, very talented con man combined to produce a story that makes Enron look like a paragon of business ethics. I’ll get into the whole story.
This bond is a monument to madness of the FOMO and hype variety. It represents what was certainly one of the first, most ambitious and, in my opinion, biggest financial fraud ever executed and one of the most successful schemes taking advantage not just of people’s greed but also their persistent obsession with shiny new things.
It is a testament to finding out if things are legit and then fading them if they are not.
It is, truly, the ultimate donut, the fraud that all other frauds aspire to, with all the elements of every great con. In honor of this piece of history, I’m going to explain the most epically underappreciated sequence of events in the history of securities fraud…
The Story of Poyais
Let me introduce you to Gregor MacGregor.
"Charles Ponzi built the original Pyramid scheme; Michael Milken sold junk bonds; Nick Leeson was the rogue trader who broke the Barings Bank; and Bernie Madoff bilked investors with trading that did not exist. All of these men were un-ambitious amateurs when compared to Gregor McGregor, the financial fraudster to top all fraudsters. He is the founding father of securities fraud."
If you think a fraudulent company going public and convincing investors to give them money is impressive, how about convincing people to invest in a country you invented? How about convicing them move to a country you invented? How about convincing them so well to move to a country you invented that they actually do it and then half of them die because it’s just a jungle?
Seriously, eat your heart out Sam Bankman-Fried.
Gregor McGregor was, by all accounts, a little much from the get go. He joined the Royal Navy in 1803 where he was above average at soldier stuff, becoming a Colonel in the Venezuelan War of Independence, fighting under Simon Bolivar, just generally going around the Americas & extending the gift of becoming British against your will to the locals. Like many frauds to follow, McGregor had some success early on - but he let it get to his head.
His first ill-fated attempt to try and become some sort of ruler was when he tried to conquer Florida (then Spanish colonies) using an army of volunteers. It sounds crazy but in all honesty is kind of par for the course back in the day. The interesting part was how he funded his little expedition. You see, Gregor McGregor understood from the beginning that if you were gonna run a grift the most efficient way was to securitize said grift.
He had raised 160,000 pound sterling from selling what were essentially CoCos on Florida. You heard right: contigent on his conquering of Florida, these bonds were convertible into large swaths of…well, Florida.
And if they didn’t work, he’d pay back the money with interest if he survived (no he wouldn’t/didn’t, but that was the pitch). Fortunately for the good people of Florida (or maybe unfortunately, since it’s hard to imagine a counterfactual where Florida is more sketchy), Gregor McGregor failed at his conquest miserably. The debtors were essentially Credit Suisse’d, if those AT1s had more colonialism and less Asian investors.
This guy was very good at getting OPM with stories but not so hot at delivering on those stories. So, like any good fraud, he realized he should give up on the trying to deliver part and just lie from the get go, that way he could focus on his true passion - getting other people to give him money.
His Mosquito Majesty
In 1820, Gregor MacGregor found himself on the Mosquito Coast. Half colony of Spain, half court-in-exile of a failed royal, all indigenous folks trying to live their damn lives, it consisted solely of a jungle and a river in Honduras.
It was certainly a pretty enough place, but also a harsh unforgiving jungle lacking any infrastructure whatsoever and rife with new tropical diseases that would just love to meet some pasty white Scottish immune systems. All that, however, sounded to MacGregor like a problem for someone who cared about delivering and, as we’ve already established, that wasn’t his deal.
Gregor met with the “King” of the Mosquito Coast, George Frederick II - the aforementioned royal who had been given the title as an appeasement (read: gentle encouragement to take a hike to a faraway land and stop bugging people about his claim to the throne) but had virtually no actual power whatsoever. Gregor saw an in - he offered him some rum and jewels for a grant of land and title.
12,500 square miles of land, bigger than the entirety of Wales, that couldn’t sustain agriculture or livestock and - being completely devoid of infrastructure - would need a massive undergoing to be remotely fit for habitation by those who were accustomed to the finer things in life. Not his problem, Gregor thought, as he hurried back to London. The scheme had begun.
“His Mosquito Majesty” lmao
Back in England, he used his status as a soldier in some relatively well known regiments to pass off a story. You see, the “Mosquito Coast” struck MacGregor as a bit…malarial .
No, this wonderful area was actually “Poyais” (totally made up word), and he - having been created the Cazique of Poyais by the Mosquito king - had been engaged to attend the King’s coronation on behalf of the people of Poyais (the “Poyers") with aims of soliciting investment and skilled workers to immigrate to a land filled with promise.
In this story, Poyais was not a barren wasteland with no other resources than disease, river and nonarable land. It was, in fact, an already settled, quite beautiful area with a democratic system of government he had inherited. Complete with a functioning civil service, military, a port capable of docking large ships, and enough tastefully appointed dwellings for anyone who wished to come. It had a theatre, an opera house and a domed cathedral; there was also the Bank of Poyais (very friendly to foreign direct investment, of course), the Poyaisian houses of parliament and a royal palace. That was the thing, this place was paradise! Filled with vast and untapped natural resources, it was just in need of some good old British manpower to bring it into the warm bosom of civility.
MacGregor mounted an aggressive sales campaign. He gave interviews in the national newspapers, engaged publicists to write advertisements and leaflets and had Poyais-related ballads composed and sung on the streets of London, Edinburgh and Glasgow. His proclamation to the Poyers was distributed in handbill form. In mid-1822, there appeared in Edinburgh and London a 355-page guidebook "chiefly intended for the use of settlers", Sketch of the Mosquito Shore, Including the Territory of Poyais.
The Sketch was pure fantasy, but with very detailed projections of future cash flow in the millions of pounds per annum that…well, I don’t think I need to explain, you know what those look like. That junior miner is going to realize those cash flows any day now, right? The Sketch went so far as to claim the rivers of Poyais contained "globules of pure gold".
MacGregor's publicists described the Poyaisian climate as "remarkably healthy ... agree[ing] admirably with the constitution of Europeans" - it was supposedly a spa destination for sick colonists from the Caribbean (in reality, rife with tropical diseases). The soil was so fertile that a farmer could have three maize harvests a year, or grow cash crops such as sugar or tobacco without hardship. Fish and game were so plentiful that a man could hunt or fish for a single day and bring back enough to feed his family for a week.The natives were not just co-operative but intensely pro-British.
The capital was St Joseph, a flourishing seaside town of wide paved boulevards, colonnaded buildings and mansions, inhabited by as many as 20,000.2
Again, jungle - river - nonarable land - tropical disease. Those four, and only those four, things were the “bounty of Poyais”. Reference was even made to a "projected Hebrew colony", but MacGregor was not primarily targeting Jewish people. Madoff, when he did so ~200 years in the future, actually used a page out of MacGregor’s book. Who is most likely to believe your bullshit? Your own people.
MacGregor targeted, from the outset, mostly Scottish investors, thinking they would find it easier to trust his fabrications.
Image from “The Sketch”, depicting Poyais as a vibrant settlement with buildings and such, the kind of place you’d expect to find a timeshare instead of malaria
This was all fiction, but MacGregor's calculation that official-looking documents and the printed word would convince many people proved correct. Remember, the more fanciful the IPO’s prospectus, the higher the likelihood it’s a short (remember WeWork’s S1?).
The meticulous detail in the leather-bound Sketch, and the cost of having it printed, did much to dispel lingering doubts. Poyaisian land certificates at two shillings and three pence per acre, roughly equivalent to a working man's daily wage at the time, were perceived by many as an attractive investment opportunity. MacGregor's attention to detail was so meticulous that by the end of 1821, even Major William John Richardson had bought into the fantasy and become an active ally. Richardson allowed MacGregor to use his estate at Oak Hall, Wanstead, as a British base for the supposed Poyaisian royal family.
In return for his support, MacGregor commissioned Richardson into the Poyaisian "Royal Regiment of Horse Guards" and gave him the Order of the Green Cross. He also appointed him chargé d'affaires of the Poyaisian legation at Dowgate Hill in the City of London, making Richardson the top representative of Poyais in Britain. Families paid for their children to be officers in the Poyaisian military, a shoemaker in Edinburgh was styled the “cobbler to the Princess of Poyais”.
MacGregor's elaborate scheme was working perfectly, and he had managed to secure the funding he needed to make his fictional country a reality.
“These crowd madnesses recur so frequently in human history that they must reflect some deeply rooted trait of human nature.”
-Bernard Baruch
There was enough demand for the certificates that MacGregor was able to raise the price to two shillings and sixpence per acre in July 1822, then gradually to four shillings per acre, without diminishing sales (contrary to the instincts of some TSLA investors, price hikes are actually indicative of stronger demand, not the other way around).
A Poyaisian Land Grant of 500 Acres
By early 1823, about 500 had bought Poyaisian land. The buyers included many who invested their life savings. But MacGregor wasn’t content to just satisfy himself with the life savings of those who wanted to move to Poyais, no. He was, after all, a man with a mission: pass off 8 million acres of wilderness as an investment opportunity in need of some development that would require lots of cash.
And, as we all know by now, Gregor MacGregors do not occur in a vacuum. There are very specific conditions that lead to their creation, it always involves low interest rates and it always ends up with them securitizing their frauds.
Reaching for Yield: 6% seems good, right?
In the early 1820s, the British economy was firing on all cylinders thanks to the manufacturing boom of the Industrial Revolution. The cost of living was dropping, wages were climbing, and the government was taking advantage - lowering rates and borrowing on the cheap. The whole country was riding high on a wave of optimism (stop me if this begins to seem like a pattern).
This optimism was accompanied by the lowest rates that had ever been seen on government bonds (consolidated stock or “consols”). Consol rates had been on a steady decline since 1800, dropping like a stone all the way to 1825. The government seized the opportunity to swap out its existing debt for new bonds paying out a paltry 3% (three percent was paltry back then, before ZIRP, not a generational buying opportunity).
All this left British investors looking for places to park their cash and match yields which had just 20 years ago been relatively risk free. Some turned to lending money to other governments, like Russia, Prussia, and Denmark, which offered higher interest rates of around 5%. Others took a gamble on mining companies, hoping to strike it rich with well-timed investments. The Anglo-American company saw its shares shoot up by a jaw-dropping 300% in just one month at the end of 1824. Irrational exuberance had taken hold.
When the Spanish empire crumbled, a slew of new countries sprang up, and London’s financial scene was quick to jump on the bandwagon for these profitable new entities. It was the city's first taste of an emerging-market boom, with debt being raised for the new governments of exotic lands: Brazil, Colombia, Mexico, and Guatemala. The yields were irresistible: Mexican bonds boasted a 5% payout, double the rate of the British consol (but 6% less than their benchmark rate today lol).
Investors were chasing returns, ignoring the warning signs, much like they did before the Great Depression, the dot com bust and the subprime crisis. Reaching for yield, investors lent money out to pretty much anyone who asked as long as the rate was high enough. Poyais, ostensibly, was in the exotic land of Latin America, a place of mystery and intrigue, where rulers came and went like the tides and the very names of the countries themselves seemed to be in a constant state of flux. New countries were being “discovered” and established weekly. Was it really so far-fetched to imagine a land called Poyais, led by a decorated general like MacGregor who had fought alongside Bolivar?
The notion seemed to hang in the air like a tantalizing possibility, beckoning those who dared to dream of new frontiers and unexplored riches. People wanted to participate in the wonder of Poyais - FOMO had taken hold. And rates were too damn low.
And that's where MacGregor's Poyais bond came in. In October 1822, he offered a £200,000 (roughly 50 million USD in 2023 prices) mortgage bond at a 5% interest rate on the sovereign debt market, the same rate as the governments of Peru, Chile, and Colombia.
The only problem? Poyais had no record of collecting taxes. But MacGregor assured investors that the country was abundant in natural resources, and that export-tax revenue would easily cover the interest payments on the debt. He had settlers, people had bought in. That was enough due dilligence for the yield starved populous - funding secured.
In 1820, 270 men set sail for Honduras, lured by the promise of a prosperous new life in the idyllic country of Poyais. They were skilled tradesmen, artisans, and soldiers. But upon arrival, they quickly realized they had been deceived.
Disease, insects, and death ran rampant, and of the 270 who set out, at least 180 perished. It went about as well as you’d imagine it would, taking 270 19th century Scots and dumping them in the middle of a Honduran jungle. Even after investors began to realize they were being fleeced, almost none of them questioned the legitimacy of Poyais itself. Despite the tragic outcome, some survivors defended MacGregor, blaming others for the debacle. One of them, who had lost two of his children, even signed an affidavit saying that the press in their coverage of the scandal had misquoted him and that MacGregor had been “worse used….than was ever a man before” and that he was not at fault for their predicament.
While this was occuring, the first “Latin American Debt Crisis” was hitting the London Exchange - Colombia had contacted to say that their representative had gone past his authority in issuing 2 million pounds of debt. LatAm bonds cratered, along with Poyais bonds. While many of them recovered, the news had reached Britain of the fate of the travelers and the obvious scam never did. And you’d figure it would end there. But it doesn’t…
MacGregor ran the scheme once more, in Paris. He was brought into trial but found innocent, and then ran the scheme twice more in Britain. Overall, he ran the poyais scheme FOUR TIMES.
He would go on to issue more than 2 million pound sterling of Poyaisian mortgage bonds and consolidated stock and land grants throughout his life, a quarter to a half a billion dollars in todays’ money.
Cleverly, the consolidated stock he issued in his next schemes would pay their dividends in acreage rather than cash, ensuring they could go much longer without defaulting. All MacGregor needed to deliver on the dividend was a grant of “120 acres”:
Speaking to the fact that he was able to secure brokers and subscribers for two more issues, one exceeding the amount of the original, a biographer wrote:
"Nobody thought to question the legitimacy of Poyais itself…some investors had begun to understand that they were being fleeced, but almost none realised how comprehensively."
MacGregor was buried with full military honors in Venezuela, having executed the fraud on varying scales a sum total of four times across Europe and being responsible for the deaths of 180 people who fell for his first scheme in 1823.
If there was ever a better analogy for the madness that low interest rates induce, I am unaware of it.
An example of Poyais 3% Consolidated Stock (issued 1827).
An Example of a Poyaisian Land Debenture from MacGregor’s Fourth Scheme (1837)
“In the sense that they existed, and their issue was subscribed and then they defaulted because they were obligations of a country that doesn’t exist, the bonds were real.”
If a country never issues bonds, does it even exist? :)
Citrini — as a purveyor of fine financial history, I’m sure you’re an admirer of our Newgate prisoner–turned–Banque Générale founder, John Law? Whatever the scale — Law or MacGregor — you’re only a fraud if you fail, and if enough people decide you’ve failed. As all great revelations are… Enron, etc.
But to your point about low rates and reaching for yield, the Mississippi Company is another gigantic case in point. Maybe even the perfect one. You unlock unlimited liquidity the moment you move from metal to confidence-backed paper… and we all know what that does to rates, and to the yield-chasing that follows. What a visionary, J. Law!
Either way, fantastic post, thank you for this. Had no idea about Poyais! I hope they issue their own stablecoin in the future.
(P.S. — I also picked up an obligation issued by some form of Moscow imperial authority a few years before the 1917 revolution. A souvenir of Taleb/Russell’s inductivist turkey problem, bought for a few euros at a Paris flea market. In keeping with the above, likely I was fleeced too — but such is the cycle of life.)
I have a decorative bond from Banque Industrielle de Chine (1913) for FR 50 million issued on behalf of China. Still has coupons. Paid $150 on eBay about 20 years ago. Paid probably $350 for fancy frame.
Just saw it again on eBay for $1.50. So much for antiques holding value.
SPACs are kind of cheating, but it *is* still inexplicably over 600m in marketcap - pencil me in for $SPCE. Closing on account of another accident or Branson's despair at seeing a successful Starship launch.
Wow. Very interesting, thank you. Anyone else reminded of Musk and the Teslatards as they read this? "Despite the tragic outcome, some survivors defended MacGregor, blaming others for the debacle."
First idea is $LILM. Really enjoy your substack Citrini. I also find success and happiness in Passion AND Detachment.
My favorite financial fraud is the Salad Oil Scandal.
https://www.investopedia.com/terms/s/saladoilscandal.asp
I had a one year course of economic history in the university. It contained zero information on Poyais.
“In the sense that they existed, and their issue was subscribed and then they defaulted because they were obligations of a country that doesn’t exist, the bonds were real.”
If a country never issues bonds, does it even exist? :)
Citrini — as a purveyor of fine financial history, I’m sure you’re an admirer of our Newgate prisoner–turned–Banque Générale founder, John Law? Whatever the scale — Law or MacGregor — you’re only a fraud if you fail, and if enough people decide you’ve failed. As all great revelations are… Enron, etc.
But to your point about low rates and reaching for yield, the Mississippi Company is another gigantic case in point. Maybe even the perfect one. You unlock unlimited liquidity the moment you move from metal to confidence-backed paper… and we all know what that does to rates, and to the yield-chasing that follows. What a visionary, J. Law!
Either way, fantastic post, thank you for this. Had no idea about Poyais! I hope they issue their own stablecoin in the future.
(P.S. — I also picked up an obligation issued by some form of Moscow imperial authority a few years before the 1917 revolution. A souvenir of Taleb/Russell’s inductivist turkey problem, bought for a few euros at a Paris flea market. In keeping with the above, likely I was fleeced too — but such is the cycle of life.)
I have a decorative bond from Banque Industrielle de Chine (1913) for FR 50 million issued on behalf of China. Still has coupons. Paid $150 on eBay about 20 years ago. Paid probably $350 for fancy frame.
Just saw it again on eBay for $1.50. So much for antiques holding value.
New hero unlocked.
Some of their old certificates adorn my walls-
https://rm-smythe.com/
Can we get a piece on all your other art!?
$MLTX currently priced around $40.55.
SPACs are kind of cheating, but it *is* still inexplicably over 600m in marketcap - pencil me in for $SPCE. Closing on account of another accident or Branson's despair at seeing a successful Starship launch.
Wow. Very interesting, thank you. Anyone else reminded of Musk and the Teslatards as they read this? "Despite the tragic outcome, some survivors defended MacGregor, blaming others for the debacle."