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Buying Stocks Is Lending
Newton made actuarial calculation possible; around 1700 Britain built a large debt market where debt could be sold and divided, turning lending from a life-or-death struggle into a win for three parties — buying stocks is, in fact, lending.
1. Who turned lending into a good business
Who turned lending into a good business? Newton.
Newton invented calculus, and the scientific revolution he and his generation set off gave the world the ability to do actuarial calculation. Without Newton, there would be no modern financial market.
It's worth mentioning that Newton was also a victim of one of the most famous bubbles in human history. When the South Sea Company collapsed in 1720, he lost heavily — reportedly £20,000. Look it up if you're interested.
It is precisely because of calculus that working with limits became possible, and that stock issuance and forecasts of earning power could be calculated precisely.
2. The dawn of modern financial markets
Around 1700, a large-scale debt market appeared in Britain. This was the dawn of modern financial markets: before it was a dark age, and in that moment, light broke through.
In the past, a producer who borrowed money and couldn't pay it back would be hounded by creditors, sometimes at the risk of their life. So when Britain built a large debt market around 1700, what was the key change?
It was this: when a producer borrowed to produce and couldn't repay, the creditor could sell the bond and get the means of production back.
And the debtor? They didn't have to pay right away, and could keep on producing.
3. Debt can be divided
What's even more crucial? Debt can be divided. A debt of 1,000 can be split into 1,000 pieces.
Better still: just as a thousand readers see a thousand Hamlets, a thousand people looking at the same bond can see a thousand different values. So trading begins, prices go high and low, room for arbitrage appears, and the market comes alive.
The result: creditors can easily transfer their claims, small creditors get room for arbitrage, and best of all — debtors don't have to repay for the time being.
Three parties take part. Where two sides might once have fought to the death, it now looks like a win for all three.
4. Buying stocks is, in fact, lending
From the bond market that appeared at the end of the 17th century to the early 18th century, the debt market turned into a stock market.
In 1694 the Bank of England was founded, and it got its start by lending money to the government. In 1720 the South Sea Company swapped British government debt for its own shares — and just like that, debt became equity. Yes, the very same South Sea Company that cost Newton so dearly.
This one small change decided the broad future we have today. It decided why we should take the road of investing, and why we should take the road of buying stocks.
After all this, what I really want to say in the end is: buying stocks is, in fact, lending.
So if, at the start, we tried to understand interest as so-called human impatience, we could never understand the world of investing. The more you think, the more you go in circles, and the more muddled your head gets. And out there are plenty of charlatans — people talking nonsense, people practicing what amounts to witchcraft — who not only lead everyone to misunderstand the financial world, but also make them believe investing is nothing but gambling.
So in the next post, we'll properly understand what buying stocks on a securities market really is, at its core.