The writer is a former editor of the Financial Times
Clarence Saunders was not a man to be pushed around. When members of his golf club complained that he was overtipping the caddies, his response was to construct his own private golf course in the grounds of the pink palace he was building for himself in Memphis, Tennessee. And when, at the end of 1922, Wall Street speculators — or “welchers” as he liked to call them — started to sell shares in his company, Piggly Wiggly Stores, he decided to buy them up, and to keep on buying.
He was, he said, determined “to beat the Wall Street professionals at their own game”. The result turned out to be the last big head-to-head clash between private individuals and the financial establishment for nearly 100 years, but one that is now being played out again in a rather different form by legions of outsiders on the Reddit platform.
Individually, they don’t have anything like the resources that Saunders could bring to the game. But collectively they pack a real punch which, like him, they focus on a single target. Like him, they take pleasure in giving the Wall Street professionals a black eye. And they are not shy about touting the bargains to be found in whatever they happen to be promoting.
Saunders didn’t have the internet to rally his supporters, so instead he placed giant newspaper advertisements to promote Piggly Wiggly shares. “Opportunity! Opportunity! It knocks! It knocks! It knocks!” And, like the Reddit crowd, he presented himself as being on a crusade against the amoral barons of the stock exchange.
The big question is whether Reddit’s traders will suffer the fate that met Saunders at the end of his struggle. Bankrupt and fired from the company he had built, he cried out to the assembled mob of reporters: “They have the body of Piggly Wiggly, but they cannot have the soul!”
At the start, everything seemed to be going his way. Convinced that Piggly Wiggly was heading for a fall, Wall Street traders borrowed the shares and sold them in large numbers, hoping to be able to buy them back later at a lower price to clear a profit.
What they hadn’t reckoned on was that Saunders would be willing to borrow so much money that he could buy just about all the shares there were. He had created a corner in Piggly Wiggly, which meant that the only person able to sell the Wall Street traders the shares they needed to settle their transactions was Saunders himself. And, since there were no other sellers around, he could charge them whatever he liked.
The Piggly crisis, as described by business historian John Brooks, dominated the financial news in the opening months of 1923. By late January, the company’s share price had jumped by around a half to $60, and on March 20 it briefly touched $124. On paper, Saunders had made millions, and senior members of the stock exchange who had been actively selling the shares faced ruin. But the authorities spotted a crafty way out. They changed the rules.
Trading in Piggly Wiggly was suspended, and the delivery deadline for those who had sold shares they didn’t own was extended until further notice.
This was bad news for Saunders, who had built up enormous debts to acquire the shares that had to be repaid. He mounted a valiant campaign to persuade the citizens of Memphis to bail him out. As his newspaper advertisement said, “For Piggly Wiggly to be ruined would shame the whole South”. But not enough people rallied to his cause, and by August it was all over.
Saunders was to be the last of his kind. The arrival of the Securities and Exchange Commission in the 1930s took much of the fun out of playing the market. More important, financial power and influence were shifting rapidly from wealthy individuals to mighty institutions. The days when John Pierpont Morgan could turn the market with a flick of his pen were over.
Over, that is, until small investors acting together decided to focus their resources on a single target — a company like GameStop, for instance, in which financial institutions were known to have a large short position in the shares.
A burst of buying from out of the blue, this retail army realised, would force the professionals to buy back the shares they had sold, driving the price up sharply in the process.
Does this change the game? It’s hard to see how these newcomers could be checked by the regulators. For a start, it’s not obvious that they have done anything wrong. And few tears are being shed for any hedge fund billionaires who lost a fortune on GameStop. After decades in which average incomes have stagnated, while huge fortunes have been made in finance, there is a pleasing David and Goliath feel to the recent encounters. Prosecutors won’t win votes by going after retail traders in order to protect the Masters of the Universe.
What’s much more likely to end the party is the market itself. Millions of new investors have been drawn in by years of rising share prices, commission-free trading, and — probably — the lack of anything better to do at a time of pandemic lockdowns.
This sounds and looks like a classic stock market bubble. No one knows how long it might continue. But today’s bold speculators should remember the fate of Clarence Saunders.