Why Does The Stock Market Even Exist?

Meet Chris Sipes: A Non-Historian Tackling Market History

[0:00] DANO WEIR: It's All Money brought to you by Sonoma Wealth Advisors who are a financial advisor who deal with the stock market but I have to take it a step back and say why does the stock market even exist? My name is Dano, I'm the host, I'm joined by my co-host today, one of the co-founders of Sonoma Wealth Advisors, he is Chris Sipes, CFP, AIF and ready to roll and also a registered historian as well.

[0:30] CHRIS SIPES, CFP®, AIF®: License. Well, we were just going to start the whole thing off by saying, I am not a historian. This is high level. Do your own research.

[0:39] DANO WEIR: So Darren and I host the show. Chris is Darren's business partner. I had an opportunity to have Chris on the show and I thought, I need to take advantage of what Chris can do best. And I know what Chris does best is he's always said, I know a ton of stuff about market history. I'm probably the only person who cares about this, but I know a bunch. And so I said, okay, dude, you're going to be on the show. Do that market history thing you've always told me about because I'm fascinated and I'm ready to go. So the question for today's episode is why does the stock market exist? Where did it come from in the United States?

[1:11] CHRIS SIPES, CFP®, AIF®: Yes. And first shout out to my beautiful wife, Sandra. Love you, honey. She's the one who came up with this question because I asked her, I'm like, I'm like out of all the topics. I'm like, when you told me you want to talk about a historical money thing, I was like, wow. This is going to be boring. No one's going to listen to this. So I got to ask my wife, what would she actually be interested in? She said, well, why don't you just talk about like where markets even came from? Cause I would listen to that. And I was like, you would, she'll probably never listen to this by the way. But here we are. So I thought it was kind of fun, but I heard, I heard somebody talking about it on another podcast just a week or two ago that think about the weird concept of like the markets where you put your money into this, you know, nebulous place. We're exchanging things. We're looking at numbers on screens and listening to numbers. Isn't it crazy that like we all use this system? Like when you step back and you just think about it, it's, it's, it's pretty wild.

Why Markets Have Existed as Long as Humans Have

[2:14] DANO WEIR: And you, you were worried that it's going to be boring, but if you're listening to this, watching this, I just implore you to remember that all this stuff is man, woman made, right? All this stuff was just invented. Right. Like there was just a dude, there was just a gal and they're like, you know what we should do? And that's where it came from. And that could have been you. It's so much later now that it doesn't feel like it. It's so official. But at one point, this was completely made up. Yeah. So as you're listening to the story, just imagine being that person in that moment or even knowing that person. What's Mike doing? Right. I heard he's making a stock market. Right. So try and be in that moment as Chris tells the story, because that's it. That's real. That's what history really is.

[2:58] CHRIS SIPES, CFP®, AIF®: Yeah. History is, you know, it's, it's more of an evolution, right? It's not like a guy and a girl came together and said, let's make a stock market. Right. It didn't, it didn't happen like that.

[3:14] DANO WEIR: That's the real.

The Pogs Craze: A Kid's-Eye View of Speculative Trading

[3:15] CHRIS SIPES, CFP®, AIF®: Let's look at maybe our first, our first picture. Cause this is what kind of came to mind this morning when I was thinking about like, how did these things just pop up? How did markets pop up and i'm of a certain age that when i was a kid we played with these do you know what these are Dano i do they have these on the West coast i was in our wonderful team at force media who won't turn the cameras around and look at themselves but maybe i'll go maybe i'll go behind the scenes content these guys have no clue when i said you guys probably don't know what you thought you okay okay talk about pogs they said what well you guys are looking at like one of the hottest commodities at least in my area now now this is like probably early 90s Dano so like you were growing up in California so you guys probably had this in like the 80s because i was in ohio it was like 94 93 yeah yeah so they these are called pogs and then you had slammers and it was a game that kids played together where You get these stacks and you hit it with a slammer. And if you flip them over, you get to keep the pogs.

[4:28] DANO WEIR: They're little pieces of round, they're circular cardboard pieces. Yes. They had pictures of popular characters or team logos or any number of things. And it was supposedly a game where you would stack the paper on top of each other. You stack them up and stack a 10. And then you would, they would only have the picture on one side. The other side was blank. Right. And you would take what was called a slammer, which is a hard plastic version of the same shape. Slam the stack. Yes. And one person would get the ones that were facing up with the logos and the other person would get the ones that were blank. Correct. And so in a way, it was considered gambling and was outlawed at McDowell Elementary in Petaluma.

[5:09] CHRIS SIPES, CFP®, AIF®: I believe if I had become, you know, outlawed where I was as well, because like kids got really into this, especially the slammers. They were all different sizes and designs and. It was cool. And what, where I'm going with all this is we created our own market.

[5:25] DANO WEIR: Yes. Right.

[5:26] CHRIS SIPES, CFP®, AIF®: Right. I mean, I would trade lunch. I would trade clothes, bikes, anything. Right. I mean, were you guys like that? Where it was like, dude, I want your slammer. I'll trade you X, Y, Z. I'll give you all these pogs for your slammer. Right. You're setting prices. It's a market. Right. And it's based on. You know, fear of missing out, greed, all the things.

[5:50] DANO WEIR: Envy.

[5:51] CHRIS SIPES, CFP®, AIF®: Envy. Yes. The biggest driver probably of anything.

[5:54] DANO WEIR: You're going to find out what kind of an investor I am. I never made a trade. I just collected. Okay. Them all. Right. And then I was like afraid to play the game, but I would take them out and look at them. And I still have them in my attic. All of them. And I almost brought them in today. Didn't get a chance to.

[6:12] CHRIS SIPES, CFP®, AIF®: So, well, if you weren't into pogs, you can substitute whatever cool thing it was for you when you were a baseball card, baseball cards was another one. Yeah. Right. But, but I think you get the point that it markets are a part of being human. Yes. We have things, we see other people have things we want, right. Other people want things that we have, we want to exchange them. And, and so these things happen, happen. Naturally. Yeah. Right. And so, early, you know, they, the other thing about history is it depends on who you ask. Right. And there's like, you know, we, we, all of us are living in a time where two people can watch the exact same thing happen and there's two different stories. Right. So, and it's always been thus with history. So keep that in mind as we talk about it. But, but, you know, ancient Rome in France, you know, like I think it was like 400, maybe year 300 or some is one of the earliest times where they were exchanging securities in coffee houses. Right. And so they would, they would go exchange. The most common one was like debts on farmland, right? People needed money. They needed capital to go plant whatever that was that they were, they, you know, had to plant and get through the growing season. And then. You know, they would harvest their, their crops hopefully, and then get money back to pay off whoever. Right. And so the people that had money would exchange that. They might lend money to one person and then they would exchange those contracts by the dad.

[7:54] DANO WEIR: And then, yeah.

The Dutch East India Company and the Birth of the Public Stock Exchange

[7:55] CHRIS SIPES, CFP®, AIF®: Yeah. So, so markets have been around probably since humans have been around, but then it became more like official, I guess the most official one, if you research it is, is the, the, the exchange in Amsterdam, right? When the Dutch were the main power. And this is prior to the British empire. So the Dutch were like the big empire prior to the Brits. Okay. So this would have been 1600, 16. Let me just look at my cheat sheet here. The 1602 was the Dutch East India company. That is when the first official... Common stock was issued. And so the Dutch were merchants. They were shipping things all over the world, basically. And shipping, as you can imagine, especially at that time was extremely risky. And so they had to find a way to spread out that risk, finance those trips. And they had this market, but this Dutch East India company was one of the first that offered shares to the public. It wasn't just investors.

[9:09] DANO WEIR: So they're making trades all around the world. Yes. And they're a profitable company.

[9:13] CHRIS SIPES, CFP®, AIF®: Well, they're not trading all over the world. They're shipping goods.

[9:18] DANO WEIR: Okay, they're shipping goods all over the world.

[9:20] CHRIS SIPES, CFP®, AIF®: The trading is happening in one place in Amsterdam.

[9:22] DANO WEIR: And they're letting the public know, hey, if you give us some of your money, we'll give you even more of it back.

[9:28] CHRIS SIPES, CFP®, AIF®: Yes. There was a charter formed where the government basically gave this company like semi-governmental powers. Where they were going to go trade with Asia. And they said, how are we going to finance this? Well, they wanted to let the public in on that so that the public could buy shares in this company. And this is in 1602. So this was a wholly new concept basically at that time. Wow. Okay. Now Dutch is each India company is like, it would have been like the Nvidia or the Apple of its time. It was the biggest company, right? They were, they were everywhere. Yeah. This is pre railroads. The only way you could get stuff around was, was shipping.

[10:10] DANO WEIR: Okay.

Tulip Mania: The First Recorded Speculative Bubble

[10:11] CHRIS SIPES, CFP®, AIF®: Okay. So why do we have tulips? I'm not sure about this photo, but it looks close. The reason why that's important is because In 1635, the Dutch came into what's considered now Tulip Mania. Okay? And I love looking back at stuff like this because it seems so ridiculous to us. And it's far enough removed that like.

[10:33] DANO WEIR: I want to have you talk.

[10:35] CHRIS SIPES, CFP®, AIF®: Nobody feels passionate about tulips to the point where they can argue like, no, but tulips really were worth a lot. You know, like if you're talking about some asset today, like Bitcoin, getting a discussion about Bitcoin or something, people feel very passionately. This is long enough ago where you're like universally. What? Tulips, right?

[10:57] DANO WEIR: What was tulip?

[10:58] CHRIS SIPES, CFP®, AIF®: Okay, so they brought tulips back from Asia because tulips actually weren't, you know, native to the Netherlands. And rich people started having tulips on, you know, as decoration. People started wanting to buy tulips. And it built and built and built. To the point where this one variation of these tulips, and apparently the reason for the change in the colors in the leaves was actually some sort of fungus or virus. I think it was a virus. So the flowers were actually sick, but it would create this variation in the tulips and they were rare. So another investing concept. The more rare something is, you know, the more people want it because of envy. Right? It's crazy. Only one person has it. This is the only one, right? And so anyway, these tulips got to the point of pricing where you could literally buy a house for the same price as a tulip.

[11:58] DANO WEIR: In 1635.

[12:00] CHRIS SIPES, CFP®, AIF®: An expensive house. Like they were saying it was like a mansion. You could either buy a mansion or you could buy a bulb of This Semper Agam. One? One.

[12:10] DANO WEIR: Wow.

[12:12] CHRIS SIPES, CFP®, AIF®: That's the way the price got. And so these. These feelings that humans get are as old as time, right? Where it just snowballed on itself. There's stories of, you know, carpenters getting loans on their tools so that they could buy tulips. A botanist from England came there and he didn't realize that they were having this tulip mania and he cut into one as a botanist and they took him to jail apparently. Right? I mean, it was, people were...

[12:46] DANO WEIR: Jacked about tulips for a couple of years yeah in the Netherlands in the Netherlands so so there was all different kinds and what did the tulip mania was it a result of the the Dutch East India company expanding.

[13:02] CHRIS SIPES, CFP®, AIF®: They were able to get there they were able to go to places i don't know specifically on that but probably loosely because they they brought them from Asia so it was one of the things that they you know benefited from but this is this is 30 years down the road from when that that company was started.

[13:16] DANO WEIR: So sure.

[13:18] CHRIS SIPES, CFP®, AIF®: By this time, the Dutch are very, you know, wealthy for their time. They're, they're completely dominating the financial world. They were the, they were the reserve currency of their time type of, of domination. And so, and you see that historically, whichever country is typically like the leader in trade, and, and commerce is, is also the seat of global financial. Global financial world. A lot of the innovations happen there. Another cool thing about the tulips is that's actually where they trace the futures market too. So like a futures market is if you're a farmer and you're going to plant corn, you have no idea what the weather is going to be like. Like, you need to know kind of what the prices are going to be on corn. So you can go to the futures market and you can sell your corn on the futures market at a specific price. Well, the tulips, that's where that came from because there was only a specific growing season for the tulips. And they thought, how can we actually sell tulips when there's no tulips to sell? Well, they did futures and then they would swap contracts. Like you and I would say, you know. I've got a Semper Augustus planting, you know, that's going to be due in September. How much will you pay me for it? And they were swapping those futures contracts as part of this whole thing.

Why Humans Keep Repeating the Same Bubble Behavior

[14:43] DANO WEIR: I mean, it sounds insane, but it's just, I mean, how many times in your life have you been swept up in something like this?

[14:50] CHRIS SIPES, CFP®, AIF®: Right.

[14:51] DANO WEIR: You get swept up in the culture and the atmosphere and the people around you are doing it. And it's just part of what people do and blah, blah, blah, blah, blah. Yes. Exactly like pogs, exactly like Bitcoin, exactly like. Gold. I mean, the, the, the viral aspect of it is just, is, is, is insane. That's, that's so funny. It's, it's unintended. And then it's like, Oh, it makes it better. You know, it's like, right. Right. Very funny.

[15:19] CHRIS SIPES, CFP®, AIF®: Yeah. You see your neighbor getting rich, right? There's no, I think it was JP Morgan that said something like, you know, there's nothing worse than seeing your neighbor get rich. Right. Yeah. So, so yeah, it was, it was kind of this, This thing that just took off and sounds totally ridiculous to us now, but very smart people like famously Sir Isaac Newton. Was one of the people that got swept up in this and lost a lot of money in, in the tulip mania. Cause once it crashed, when it stopped, there was a thing, there was a crash. Well, yes, I think so. That's one of the things where, you know, this, this actual historian said she went back and.

[16:02] DANO WEIR: And found that Chris is not an actual historian.

[16:04] CHRIS SIPES, CFP®, AIF®: I can't find, he's in the corrupt seas and stuff. So it's, it's murky, but yes, I think it's mostly accepted that, that there was a crash. Eventually people no longer care about pogs. Right. Right. Right. And, it was the same thing with the tulips. And it, it usually has something to do with debt. You know, people borrowing money against their tools to go buy this thing. Debt is always, it is almost always a part of a, of a mania and a bubble before something bad happens.

From Beanie Babies to NFTs: Modern Echoes of Old Manias

[16:35] DANO WEIR: I'm thinking about more of these beanie babies. What's the, Oh, what's the digital image one.

The Financial Torch Passes: Amsterdam to London to Wall Street

[16:43] CHRIS SIPES, CFP®, AIF®: Nfts nft yes yes yep the board ape yes it's all it's the same right it's it's the it's the rarity of it right and so so anyway it's it's informative i think but very interesting to see nothing much much has changed next we've got kind of fast forwarding through a lot of history, but the fast from Amsterdam being the seat of the financial world, then it goes to London. And, and, and that's mostly because the British were the, the next empire, you know, the Dutch had their time in the sun. They did extremely well. They got too rich, bad things happen, things blow up and they lose it. Usually it's, you lose a war, it gets transferred to the next, you know. Regime, which happened to be the Brits. And so the London stock exchange was formed somewhere in the 1790s. I don't have it on this. But they kind of took the Torch from the Dutch as the next seat of the financial world in the West. Strangely enough, the Americans also started their exchanges about the same time. In the 1790s. And we, I say exchanges because we had two. We had two big ones, at least. The Philadelphia exchange. And then we had one in New York. Really? Yes. Yeah. So, kind of wasn't, you know, and of course at this time, America was kind of, you know, a backwater in terms of financials, right? So, it wasn't like it is now where it's the seat of the global financials. System. And so, it, it, it, it was, there was some back and forth on who would wear the seat of financial power. Right. So, but what was interesting, if we go to the next picture, a lot of, a lot of the trading, you know, before there's a formal exchange in a country, a lot of times it just happens in places where people tend to meet like coffee shops and bars. And so they would call it the, you know, the house of this or the house of that. And that's where everybody got together to exchange securities. You know, there, before the London stock exchange, there was this, this coffee shop where they would just put a list out of here's, here's the companies that we're trading in. If you're interested in, you want to come in. And as you can imagine, there's all kinds of fraud and like, you know, I could just create my own stock certificate and claim it to be true, but you know, that's where reputation comes in. Into play. Like if I'm going to go buy a share of something from Dan, I'm going to want to know he's got a reputation and a track record of being someone that that's a legit stock certificate or whatever. Right. So there was a lot of skin in the game for these, these folks to start this. So I thought this was, was kind of interesting. The, the reason why they call it wall street, just to take an aside for a second, is that New York before it was New York was New Amsterdam. Going back to the former financial, it was New Amsterdam. They had put a wall there to keep the Brits out, and it was on the north side of the city. Didn't work. The Brits came in through the south and sacked the city. But once it became New York, they removed that wall, but they kept the name of the street where. Where that place used to be because it was a common place where people traded goods and services. Some not so good ones like, like slaves, but also things like wheat, sugar, and those types of things. So it kind of, it formed there before it was an official thing. So. So the picture we're looking at here was a depiction of the area in New York prior to it becoming an actual exchange, the New York Stock Exchange, in what they called the Buttonwood Agreement. They called it the Buttonwood because there was a tree, apparently a Buttonwood tree, where the brokers would get together and trade securities back and forth. There was a crisis. There was a crisis prior to the formation. These 24 brokers came together and formed this exchange. And they said, okay, it's just going to be us trading. They set the price. They set the minimum prices on the commissions, basically. And they just said, we're the only ones we're going to basically trust to make these trades. And it evolved from there. But that's another kind of theme with markets is that you get crisis. Things change. Regulations change. There's things put in place for a reason. There's a period of calm and tranquil and people forget why all those regulations were put in place. Oh, that'll never happen anymore.

Mortgage Securities and the Cycle of Crisis and Regulation

[21:54] DANO WEIR: Putting those mortgages into security.

[21:56] CHRIS SIPES, CFP®, AIF®: Yeah, exactly.

[21:57] DANO WEIR: Why are we trying to push those mortgages so high level? It's just, just give anybody one. Don't make it so stringent. Right. Be fine.

[22:06] CHRIS SIPES, CFP®, AIF®: Right. So we'd make the changes again and then boom, we usually get another sort of issue. So, but this, but this picture was the, was the coffee houses that were, where the trading was happening, you know, prior to what we know today is the New York Stock Exchange.

[22:25] DANO WEIR: Crazy.

[22:26] CHRIS SIPES, CFP®, AIF®: Yeah.

[22:27] DANO WEIR: It's just absolutely fascinating how, and that's why I prefaced the conversation with trying to imagine yourself being there because, you know, you're, you're born and all this stuff just already happened and you just go, oh, okay, there's just a major league baseball.

[22:41] CHRIS SIPES, CFP®, AIF®: Right.

[22:42] DANO WEIR: Well, no, you know, there were random, you know, individual owners and they all had to come together in a league. And, you know, the NFL was actually two different leagues to begin with, and it had to combine. And, you know, there's, there's, there's so much that has already happened. And it all happened with people who were just either, you know, doing their best or maybe not doing their best, you know, trying to make it work. And it all is still human. Right.

[23:06] CHRIS SIPES, CFP®, AIF®: It's kind of unbelievable that happened. I mean, they used to keep track of everything in a book, you know, in Amsterdam. They call it the capital book, I think is what they called it. And I was looking for pictures of it because I was like, that'd be really cool if they had one of those where you could see, you know, the ledger of all the trades. Right. And you think about it, you're like, yeah, how do they keep track of who owned what? You know, and the trades that were happening and such, but that's why, that's why traders today still refer to, I'm managing my book.

[23:32] DANO WEIR: Right.

[23:32] CHRIS SIPES, CFP®, AIF®: Right.

[23:33] DANO WEIR: There's not any books.

[23:34] CHRIS SIPES, CFP®, AIF®: Yeah. But that's kind of one of the.

[23:36] DANO WEIR: I'd be not allowed to keep a book.

[23:38] CHRIS SIPES, CFP®, AIF®: There used to be the book, you know? And so, it's, it's one of those things you're like, wow, this is amazing that this, that people were actually able to do it prior to computers executing bazillions of trades every day.

What 400 Years of Market History Teaches a Financial Advisor Today

[23:52] DANO WEIR: So, so Being a financial advisor and knowing all of this history and operating into 2024, what's one thing that you take from the past from all this knowledge that you use when you're working with people moving into the future? Why do you care to know all this stuff? Are the principles just so obtuse and that they don't matter? Or is there anything where you go, you know, I lean on that?

[24:16] CHRIS SIPES, CFP®, AIF®: No, I think that. The reason it gives me comfort is that markets change, the faces change, the names change, but people don't change. Our basic behavior is pretty much the same now and it probably will be in the future, right? So if you take these lessons and you ask yourself, am I buying a tulip right now? Am I succumbing to my neighbor's got a nicer tulip than me? Right? Just asking yourself questions like that of, and, and also looking historically and be like, what, what has worked? You know, what did people that succeeded in the past, what did they do? What did they do consistently? How can I mimic that? You know, you don't have to reinvent the wheel. You do what other people have done to get where you would like to go.

[25:05] DANO WEIR: And that's a lesson I'll share from my own life. It's not just for investing. If you're a younger person getting into business, getting a job, or investing, or truly doing anything, there is this idea that, you know, I'm the new generation, and that means that I have to do it totally different.

[25:23] CHRIS SIPES, CFP®, AIF®: Right.

[25:24] DANO WEIR: Maybe not. You know, consider both, because the people who came before you were you just 20, 30 years ago, and they... Maybe learn from the from the prior generations right so right the the idea that whatever exists stinks and i have to do it the exact opposite is ignoring a pretty long data set that doesn't mean you have to do it the way that it's always been done i'm definitely not in favor of that consider new ideas but usually it ends up being you know an amalgam of the two.

[25:56] CHRIS SIPES, CFP®, AIF®: Correct. And, and we're, it's, it's kind of known that we're a product of the environment we come up in investing wise, right? So if you were born during a time of high inflation, or I should say when you, if you get your first imprints of money during a time, like, like I did in the great financial crisis, you operate differently than somebody that operated during a great boom time, right? So, but you have to know that these cycles have happened in the past. They'll happen in the future. And looking at prior cycles and learning, like, here's what I'm used to. What's this other part like? What did other people experience in this other part of the cycle? And how can I prepare myself for that? And realize that your vision is wider. Your scope is wider when you can understand some history and where we came from.

[26:49] DANO WEIR: I'd like to let the folks at the History Channel know this episode is available to be licensed.

Wrap-Up and Disclosures

[26:59] ANNOUNCER: Thanks for checking out It's All Money. Although it should not be relied upon as such. Any statements or opinions are subject to change without notice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Viewers and listeners are encouraged to seek advice from a qualified tax, legal, or investment advisor to determine whether any information presented may be suitable for their specific situation. Past performance is non-indicative of future performance.