Feature Article
A Canny View reader asked an excellent question after last month's column: what was the alternative? What would have happened if the Darien project had been successful?
Whilst I don't hold myself out to be a historian, I do find alternative history enjoyable reading, with its endless what-ifs.
Last month's piece (If you missed it, read here) took up Scotland's catastrophic 1698 bet on a trading colony in Panama, the one that bankrupted the nation and led, within a decade, to its loss of sovereignty to England. The lesson, plainly, was about concentration risk: bet a fifth of your wealth on one thing, and you had better be ready for the day it doesn't work.
But what if it had worked? Indulge me a moment.
It is 1698. William Paterson's vision holds. Disease is mastered through better drainage and stricter quarantine. The Spanish, having sized up Caledonia's defences, choose negotiation over assault. The English, sensing they cannot beat the Scots to the Isthmus, partner instead of obstruct.
Within a decade, Caledonia is the trading hub of the Americas. Goods from Canton and Manila are landed on the Atlantic side, hauled across a few miles of jungle, and reloaded onto ships bound for Edinburgh and Amsterdam. The Company of Scotland pays a 40% dividend in 1710. It pays one again in 1715.
Scotland enters the 18th century rich. There is no bankruptcy. No loss of sovereignty. Edinburgh, not London, becomes northern Europe's financial centre. Adam Smith, born in 1723, writes The Wealth of Nations in a country that does not need to borrow England's economic theory; it has its own.
The story doesn't stop there. The Acts of Union, in our real history, were the price Scotland paid for the Darien bankruptcy. Take the bankruptcy away, and the union never happens. So when Queen Anne dies in 1714 and the English Parliament invites George of Hanover to take the throne, the Scottish Parliament is free to make its own choice, and reaffirms the Stuart line. James Francis Edward becomes James VIII of Scotland. His son Charles Edward never has to invade in 1745, because his father is already sitting in Edinburgh.
Which means no Battle of Culloden in 1746. No Disarming Act. No proscription of Highland dress, no systematic dismantling of clan structures. Which means no Highland Clearances. Which means the great Scottish diaspora of the 19th century, the one that founded Dunedin in 1848 and put Scottish names on half the farms in Hawke's Bay, never happens, or happens at a fraction of the scale.
A successful Darien does not just save Scotland's sovereignty. It rewrites the demographic map of New Zealand.
And by the late 19th century, when the world's powers turn their attention to cutting a canal through the Isthmus, the Scots have been there for two hundred years. They have the local knowledge, the capital, and the political will. The canal opens, somewhere between 1890 and 1905, under Scottish ownership. One of the world's great chokepoints, the gate between the Atlantic and the Pacific, is not American. It is Scottish.
Speaking for myself, I highly doubt either my maternal or paternal ancestors would have made the journey from Perthshire, Scotland.
Paterson gets a statue on Princes Street. And every Scot who didn't subscribe is haunted, for the rest of their life, by what they missed.
This is the harder lesson.
The bet that pays off gets remembered as vision. The same bet that fails gets remembered as folly. The two bets were identical.
Imagine two funds in 2020. Both concentrate. Both bet on a small basket of high-conviction names. Five years later, one is celebrated as a genius and the other is torn apart in print. The portfolios looked identical at the start. The strategies were the same. What differed was which way the dice landed.
This is survivorship bias, and it is the great mischief-maker of finance. We study Buffett, not the thousand value managers who concentrated and lost. We celebrate the founder who bet the company and won, not the ten who bet and quietly disappeared. The lesson taught is that conviction beats prudence. The lesson untaught is that survival beats both.
When concentration works, you don't learn the right thing. You learn that the rules don't apply to you, and you bet bigger next time. The next Darien is always larger than the last.
What does this mean for a Canny investor at the kitchen table?
It means diversification is not, as the fund manager class sometimes implies, a strategy for the meek. It is the structure that lets you stay in the game on the day the dice land wrong. And sooner or later, they will.
The business owner whose company is 80% of their wealth is not bold; they are exposed. The retiree leveraged into a single Hawke's Bay property is not bold; they are exposed. The investor who has refused to trim a winner that now dominates the portfolio is not bold; they have simply been right so far. That is all.
The Scots who didn't subscribe in 1698 missed a fortune in the world I just imagined. In the world we actually got, they kept theirs.
Across enough rolls of the dice, the second outcome is the one that matters. The first is the one you read about.
We always enjoy the dialogue with our Canny View followers, so please keep up the great feedback, and we'll do our best to accommodate.
Nick Stewart
(Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe,
Ngāti Waitaha)
Financial Adviser and CEO at Stewart Group
Stewart Group is a Hawke's Bay and Wellington based CEFEX & BCorp certified financial planning and advisory firm providing personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
