Ice Box Investing: Lessons From Seward's Folly
William Seward's critics, however, preferred "ice box." In 1867, Seward, the secretary of state under President Andrew Johnson, negotiated the $7.2 million purchase of Alaska, over the cold objections of naysayers who insisted that the land was useless – more suitable for polar bears and walruses than humans. History books later dubbed the purchase "Seward's Folly," though it proved to be anything but a mistake: Alaska later was found to be rich in both gold and oil. Now, Alaskans celebrate Seward's shrewd move every March on Seward's Day, a state holiday.
What can investors learn from his surprising success? Here are four key takeaways for anyone considering a heavily panned investment:
1. In the face of strident ignorance, do your own research.
Contrary to popular belief, Seward had legitimate, reasoned arguments to justify the Alaska purchase. While critics decried it as a wasteland, Seward met with explorers and early settlers who educated him on the land's wealth of natural resources, such as timber and fish. There had been some early discoveries of gold before the purchase but "at the time, I don't think anybody had any understanding of just how big gold mining would be," says Lee Farrow, a history professor at Auburn University at Montgomery and the author of Seward's Folly: A New Look at the Alaska Purchase. Still, Farrow notes that the fishing industry took off not long after the purchase, while Alaska's forest economy today is booming. Gold and oil, arguably, were (very thick) icing on the cake.
As with the Alaska purchase, ignorance about contemporary opportunities that seem unusual can discourage investors and invite critics. Take cryptocurrencies, for instance. Today, some would-be investors hold legitimate concerns about whether the booming cryptocurrency is headed for a bust, but in the early days, many were discouraged by a simple lack of understanding. They were befuddled by how cryptocurrency actually worked as well as the nature of its underlying technology, Blockchain. But early investors who took the time to research and understand the cryptocurrency's disruptive potential were more confident and had the knowledge and wherewithal to mine for things like bitcoin — thereby procuring the cryptocurrency through raw computing power rather than by buying it.
The bottom line: Knowledge is power.
2. Determine whether criticism is justified, or the product of bias.
Some politicians were quick to lambaste the Alaska purchase because of animosity toward the Johnson administration. "There were people who strongly disliked Johnson and they disliked some of his policies in post-Civil War USA, so some of them were opposed to him personally and to Seward, as well," Farrow says. "If you look at the actual people who voted in favor of impeaching Johnson, many of those are the same people who tried to oppose the Alaska purchase."
Investors far less thoughtful than Seward can stumble into a windfall thanks to sheer luck.
Today, various investment opportunities continue to be vulnerable to biased criticism, with elected officials trumpeting favored industries at the expense of others and incumbent companies conveniently finding fault in competing startups. Before taking any critique seriously, it pays to discern whether the critics have ulterior motives.
3. Have patience.
The economic development of Alaska would have been impossible without the contributions of explorers and settlers who searched for resources and established the state's key industries. Their work took time. Seward, unfortunately, didn't live to see his purchase pay off; he died in 1872. But he went to his grave believing that time would prove him right. Near the end of his life, when asked of his greatest achievement, Seward reportedly cited the Alaska purchase, but added that it would take a "generation to find it out."
While Alaska may be an extreme example, many unpopular investments prove lucrative with time, just as once-popular investments may lose value through the years. Janette Rutterford, a professor of financial management at the Open University Business School in England, studies the history of finance and stresses that investors shouldn't underestimate the power of cyclicality. "I've had people say to me, over the years, ‘you'd be mad to buy growth stocks’ or ‘you'd be mad to buy value stocks’," she says. "Wait 10 years and it's the other one that wins...It's just a matter of timing."
4. Sometimes you really will get lucky...but don't count on it.
Seward didn't emphasize gold and oil as benefits of the Alaska purchase because he didn't know the depth of its gold deposits, nor did he foresee the eventual premium put on crude oil In that sense he—and more broadly the United States—got a lucky break.
Today, investors far less thoughtful than Seward can stumble into a windfall thanks to sheer luck, too. Rutterford, who used to work in the financial service sector, says she's seen colleagues benefit after basing a trade on a miscalculation or committing other errors. She recalls one options trader who entered a wrong three-letter code on a trade, which resulted in him buying a put on the stock market in 1987. "He made a small fortune by mistake because he'd got the wrong number in," she says. "I've seen lots of traders make mistakes like that."
Since you can't depend on such luck, however, an investor's best bet—especially when tackling unusual investments—is to rely on the cornerstone of prudent investing: diversification. Even Seward, arguably, diversified as he pursued the Alaska purchase – the secretary also urged the US to expand into the Caribbean.
Investors more concerned with diversifying their own portfolios (rather than a country's land mass) have it much easier, with an array of stocks, funds, bonds, commodities, and so on to cushion the blow if an exotic investment goes south. Managing risk in this fashion may not earn you your own holiday, but neither will it leave you out in the cold.
Topics: Market conditions
Olivia Engel is the Chief Investment Officer for the Active Quantitative Equity team at State Street Global Advisors. She is responsible for an investment team that manages equity strategies for clients around the world, including pension funds, insurance companies, foundations, and individuals.