You know the popular Warren Buffett quote – “Be greedy when others are fearful and fearful when others are greedy?”. The earlier version was “Buy when there’s blood in the streets, even if the blood is your own”, by Nathan Mayer Rothschild. He was one of five brothers of the Rothschild banking family back in the 18th century, and this is a very interesting story from his life.
During the Napoleonic wars (1803 to 1815) between England and France, the Duke of Wellington needed to provision troops and pay England’s allies. To transform the money raised in the bond market to gold and send them where they were needed was an expensive and hazardous challenge. However Rothschild had acquired somewhat of a reputation as a smuggler of gold, often secretly breaching the trade blockade between England and the rest of Europe during the course of the war. In addition, him and his five brothers had spread out throughout Europe – creating a ready made banking network within the family and were unique positioned to exploit price and exchange rate arbitrage opportunities.
With commissions from this business ranging from 2-6%, Napoleon’s wars promised to make the Rothschild family wealthier than ever. However, Nathan made a miscalculation that nearly sunk him after the Battle of Waterloo: he expected the latest series of the Napoleonic wars to be a drawn out one. Furiously buying up gold before the war, The stunning defeat of Napoleon at Waterloo by the Duke of Wellington left him sitting on a pile of gold that wasn’t needed anymore.
Undeterred by the gravity of the situation, Nathan Rothschild pulled a daring stunt: Using the gold he accumulated, he began to purchase British Government bonds. He was betting on the fact that the reduction of government borrowing after the war would send these bond prices skyrocketing. His audacious trade netted him 40% in profits when he sold the next year – 600 million pound sterling in today’s terms.
Of Rothschild, the German poet Heinrich Heine declared – “Money is the god of our time, and Rothschild is his prophet”
Thus Rothschild’s story is one of courage, conviction and perhaps the greatest speculative trade in history till George Soros shorted the pound. You can read about Rothschild’s story in detail in Niall Ferguson’s Ascent of Money