Samuel Bolton Jr. was a successful businessman, brewer, politician, and philanthropist in Troy, NY in the late 1800s. Why, then, did Bolton kill himself by diving into a vat of hot beer?
He didn’t understand risk.
No, not the risk of diving into boiling beer. Bolton precisely knew that risk. Instead, Bolton didn’t understand the risk of stocks. Or at least the risk of a specific stock trade he made.
May 1901 saw the “Northern Pacific Corner” occur, causing the first stock market crash on the New York Stock Market exchange. Bolton was on the wrong side of it.
The Northern Pacific railroad connected the Great Lakes to the Puget Sound. A few railroad magnates and bankers (James Hill, Edward Harriman, Charles Perkins, Jacob Schiff, and even J.P. Morgan) fought and haggled over ownership stakes in the Northern Pacific.
Naturally, the magnates’ demand pushed the stock’s price up. By 1901, Northern Pacific was trading far above its fundamental value. Many investors, such as the unfortunate brewer Mr. Bolton, knew something was amiss. The price of Northern Pacific is far too high. It’s irrational. It can’t stay that high forever. I’m going to short the stock!
Shorting, as a reminder, means you think a stock price will go down.
- You borrow a stock (Northern Pacific at $200 per share)
- And immediately sell it. (You now have $200 in cash)
- You wait some time. (If you’re right, the stock price will drop)
- Then rebuy the stock (Now only $100 per share)
- Returning the stock from where you borrowed it.
- And keeping the profit.
By market close on Tuesday May 7, 1901, the railroad magnates owned ~754,000 shares of Northern Pacific (out of 800,000 total on the market). And yet, due to short selling, the rest of the market was contractually obligated to return over 500,000 shares to the magnates. You can’t get blood from a stone, and can’t return 500,000 shares when only 46,000 exist.
Because of shorting, the magnates had nearly 100% of the physical shares in their hands and were also owed shares from short-sellers! How is that possible? Imagine this simple scenario:
- Jesse borrows a share of Apple from Steve.
- Jesse sells the share to Bill.
- Steve buys the share from Bill.
Steve owns the share he started with, and is still owed a share from Jesse.
Magnify that scenario over every share of one particular stock. “Long interest” and “short interest” sums to greater than 100%. This is what happened with the GameStop, AMC, and Bed Bath & Beyond shenanigans of 2021 and 2022.
By May 10, 1901, the writing was on the wall. Northern Pacific short-sellers had to rebuy the stock and return those shares to their rightful owners. But nobody was selling. As Warren Buffett describes it:
…And that was a case where two opposing business titans each owned over 50 percent of the Northern Pacific Company — the Northern Pacific Railroad.
And when two people each own over 50 percent of something, you know, it’s going to be interesting. And Northern Pacific, on that day, went from $170 to $1000. And it was selling for cash, because you had to actually have the certificates that day, rather than the normal settlement date.
What did people like Mr. Bolton do? They were contractually obligated to buy shares of Northern Pacific and return them to their rightful owners. But there weren’t any sellers! High demand, low supply. Prices went to the moon. Shares of Northern Pacific went from $170 to $1000 in one day!
How did investors suddenly raise the cash needed to compete for these limited shares? By selling everything else. While Northern Pacific rocketed, the rest of the market crashed. Wall Street was in chaos.
Seeing the carnage they created, the magnates agreed that short sellers could settle their debts at a rate of $150 per share owed. The markets immediately calmed down.
But not before Samuel Bolton Jr., facing mounting debts and an unknown future, took a swan dive into steamy lager.
And he jumped into a vat of hot beer and died. And that’s really never appealed to me as, you know, the ending of a financial career.
Warren Buffett
Same here, Warren. Same here.
What lessons can we learn from Bolton?
Understand your risks.
Quite plainly, Bolton didn’t understand that short-selling has an infinite downside.
If you’re short on a stock that goes from $100 to $0, you gained $100. If it goes from $100 to $200, you lost $100. If it goes from $100 to $1 million, you lost $990,000. You can lose everything from short-selling, and I’m not sure Bolton understood that risk.
Granted, most of us aren’t short-selling. That risk doesn’t concern us. But there’s still a vital lesson to learn.
Bolton was a respected man in Troy, NY. He was successful. He donated money and participated in local politics. His ale (sans human) was pretty good. So why did he make this risky trade in the first place?
He risked everything. For what? More money? He risked what he had and needed (some money and a good life) for what he didn’t have and didn’t need (even more money, an even better life).
We’re never going to risk what we have and need for what we don’t have and don’t need.
Warren Buffett
I can tell you one thing Bolton did not consider. He never once believed his short sale would lead to his decision to dive into a vat of hot beer. Not once. People are notoriously bad at answering questions like, “What’s the worst that could happen?”
Bolton might have answered,
- “I could lose a few bucks.”
- “My wife might get mad at me.”
- “Maybe I won’t be able to afford that cabin in the Adirondacks.”
He did not answer,
- “I might gonna pull a Greg Louganis into that sizzling IPA…”
- “It’s 1901 – who’s Greg Louganis?”
Learn from Mr. Bolton. Understand your risks.
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-Jesse
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