William Goetzmann: From Babylon to Bubbles — A 5,000-Year History of Finance (Investing in America Series) #632

The episode opens with Meb Faber introducing William Goetzmann, a legendary Yale School of Management finance professor whose research spans financial history, securities, and investor behavior. The conversation begins with a discussion of a 5,000-year-old Sumerian clay tablet housed in Yale's Babylonian Collection — originally donated by J.P. Morgan — which Goetzmann identifies as both the first recorded war in history and the first known use of compound interest calculations. The warring city-state presented a reparations bill calculated using compounded interest over 80 years, resulting in an astronomically large grain debt.

Goetzmann then outlines the central thesis of his book 'Money Changes Everything: How Finance Made Civilization Possible,' arguing that as cities grew, they required financial tools — interest, loans, companies, trade financing — to access distant resources and sustain large populations. He uses Rome's dependence on Egyptian grain imports as an example of how finance enabled urban civilization. He frames finance fundamentally as a technology for contracting through time, with interest compensating for both time value and risk.

The discussion moves to the origins of the corporate form, highlighting a 14th-century mill company in Toulouse, France — the Société des Moulins du Bazacle — which featured dividends, a board of directors, limited liability, and perpetual existence from 1372 until French nationalization in 1949, and has since been privatized again. Goetzmann also describes Yale's ownership of a 1648 Dutch water board bond that still pays interest, which a colleague physically travels to collect.

Goetzmann then addresses the history of financial bubbles, noting that he built an NFT price index and compared it to the Dutch tulip mania, finding the NFT bubble was historically larger. He explains that early stock market bubbles — particularly the 1720 bubble in London — arose when entrepreneurs realized they could raise capital through corporations without parliamentary approval, leading to a burst of venture-style financing for ideas ranging from steam engines to flying machines. He draws explicit parallels to the dot-com era and the potential SpaceX IPO.

On the question of whether bubbles should be feared, Goetzmann presents empirical research showing that after a stock market doubles in one year, there is roughly a 50-50 chance of continued gains versus losses in the following year, but over a five-year horizon, investors are overwhelmingly in positive territory. He notes that complete bubble collapses — where all gains are wiped out — are historically extremely rare, occurring less than 1% of the time.

The conversation shifts to behavioral finance, where Goetzmann describes Yale's 25-year monthly survey (associated with Robert Shiller) tracking investor sentiment. Using machine learning and language models, his team parses emotional content — fear, anxiety, joy, disgust — from respondents' written answers to understand how emotion versus reason drives market beliefs. He gives the example of how hearing an unrelated story about a burglar can increase someone's perceived likelihood of a stock market crash.

On portfolio construction, Goetzmann advises that investments should be purpose-driven, matching time horizon to asset allocation — near-term goals requiring safer, liquid assets, while long-term goals can tolerate equity volatility. He advocates for global diversification, noting years like 2005 when international markets significantly outperformed U.S. markets.

When asked for policy recommendations, Goetzmann expresses cautious optimism, arguing that despite the 20th century's wars and crises, diversified equity investors generally fared well because corporations proved adaptable. He uses COVID's supply chain disruptions and the real estate market's adjustment as recent examples of corporate resilience.

The episode closes with Goetzmann reflecting on his own most impactful investment decision: simply allocating his 403(b) retirement plan entirely to equities decades ago without overthinking it. He also shares that his wife insisted on buying Apple stock despite his preference for diversification — a decision that generated significant outperformance and family bragging rights.