Wednesday, October 1, 2014
FAIRFIELD-SUISUN, CALIFORNIA
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Investors ignore Hunt brothers’ cautionary tale

stevenson column sig

By
From page B7 | June 15, 2014 |

OK, since it’s Sunday, it might be a good time to make a confession. No, not that – I’m talking about the stock market.

Ever since I planted myself on Wall Street – the actual street – when I was 16, I enjoyed hearing stories about wealthy investors getting clobbered. I guess that’s because I have a case of – I have to use the German word – “schadenfreude,” pleasure in other people’s pain.

I’m exaggerating, of course; if I hadn’t become a broker, I would have been a bell-ringer for The Salvation Army.

That’s by way of introducing one of the greatest cases of financial comeuppance in the past 50 years. The story goes back to the 1970s, when the Hunt brothers, Nelson Bunker Hunt and William Herbert Hunt, began accumulating silver in the commodity market.

By 1979, they had almost reached their goal of cornering the silver market. “Cornering,” if you’re not familiar with the term, is when a trader or any wealthy, greedy investor controls so much of a stock or commodity that they can determine the price. Anyone who wants to buy or sell the commodity has to come to them and pay or get whatever the trader wants.

As a result of their trading – primarily Nelson’s – the silver market was in the Hunt brothers’ pockets. One estimate is that they made between $2 billion and $4 billion as silver rose in price. Of course, it went from $11 to $50 because of their buying, but, surprisingly, these brilliant billionaires had no strategy in mind if the market went against them. And go against them it did, big time, as we would say.

Think about it: They effectively had ownership of 100 million ounces selling for $50 an ounce. How long did it take for Nelson to make his billions in silver? Not very long – silver was selling for $11 an ounce in September 1979. Four months later, it soared to $50 an ounce and some so-called analysts were saying that $100 an ounce was the next stop.

Then, the roof fell in, as silver futures plunged more drastically than at any time in the history of the futures market. The record still stands, as far as I know.

If you’re wondering why Nelson didn’t sell his holdings as his losses accumulated, it’s because he couldn’t. I’ve mentioned before that something as rare as a solar eclipse took place. Silver was hit so sharply that it was trading “locked limit down.” What that means is that you couldn’t sell your holdings at any price. You would just have to grin and bear it, although I would guess Nelson Hunt wasn’t grinning. The collapse in his silver holdings resulted – no surprise – in Nelson’s bankruptcy.

Fast forward to this past Friday and look at the headline in The Wall Street Journal: “Big Investors Lose as Markets Rise.” Let me quote the first sentence, which frankly, was a pleasure to read: “Some of the biggest investors on Wall Street are losing money with wrong-way bets in markets around the globe, a surprising black eye amid a rise in stock and bond prices.”

Hedge funds, with their millionaire investors and millionaire managers, were losing money as the markets were rising. Of course, their fortunes may reverse in the coming weeks, but it’s nice to know that even the allegedly smartest minds on Wall Street were no match for the averages. Many of those financial whiz-kids are used to earning multiple millions every year as a reward for their market-beating skills.

Do you think condolences are in order?

Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at Bsteven254@aol.com.

LEAVE A COMMENT

Discussion | 3 comments

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  • Rick WoodJune 15, 2014 - 3:28 am

    People shouldn't be able to make billions doing what hedge fund managers do unless they have the risk also of losing billions if they are wrong. It's the easy money and government being the insurer of last resort (too big to fail) that is a problem with our system.

    Reply | Report abusive comment
  • John AndersonJune 15, 2014 - 6:29 am

    Hedge fund managers should have to report gains as ordinary income, subject to tax

    Reply | Report abusive comment
  • Dr russtJune 15, 2014 - 12:39 pm

    To portray the Hunts actions as those of greedy speculators, out to corner the silver market is disingenuous. The Hunts were acting to hedge against the Keynesian economic model that the government was following, which includes debasement of our money. They were then financially assassinated by the Fed, the CME and the CBOT. An investigation later revealed that board members of the CBOT had accumulated short positions prior to issuing new rules related to silver futures contracts. The Hunts goal was to issue silver backed bonds. If they were just looking to speculate, they could have done that through futures contracts. The fact that they took physical delivery and paid massive storage fees, proves to me that this was more about ideology than making a quick buck. Not to mention that they were quite successful before investing in silver.

    Reply | Report abusive comment
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