A Positively Asymmetric Risk-Versus-Reward Setup
A Safe Play That Still Has Big Potential Upside
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Creak. Creak. Creak.
In the windowless room in the basement of Castle Weissenstein, the 12-foot-tall, mysteriously shrouded wheel began to turn.
The door slammed shut. Ceremoniously, Prince Karl of Hesse-Kassel sealed the lock with hot wax and posted a guard.
One month later – on January 4, 1718 – the seal crumbled. The door swung open.
And there stood the oilcloth-wrapped wheel… without a motor, without an attendant… still revolving, at exactly the same speed.
Apparently, Johann Bessler had been telling the truth. He had invented the world’s first genuine perpetual-motion machine… or so it seemed.
Bessler, an itinerant watchmaker from Zittau, Germany, claimed he’d “harnessed gravity” to create a source of unlimited energy. In a world that still thought of alchemy as a respectable science, this wasn’t as far-fetched as it sounds today.
And… for a while, anyway… Bessler had the biggest brains in Europe to back him up: Dutch mathematician Willem ‘s Gravesande, British instrument maker John Rowley, and German polymath Gottfried Liebniz, who helped invent calculus, all attended demonstrations and believed the wheel was real.
Bessler himself was more showman than scientist. Feeling that his name lacked panache, he created a cipher that transposed “Bessler” into the much more exotic-sounding “Orffyreus,” and took his wheel on tour under that stage name. He debuted a six-foot wheel at Leipzig in 1712… a 12-footer at Merseburg… and, finally, pulled off his locked-room castle stunt at Hesse-Kassel in 1718.
His carnie tendencies naturally went hand in hand with a bit of grifting. He blanketed the continent with sensational pamphlets, attempting to drum up financial support. He charged general admission to curious onlookers, and he offered a peek behind the oilcloth curtain for the low, low price of 10,000 pounds a person. (Surprisingly, no one took him up on the offer.)
By 1720, Bessler’s wheel had garnered international notoriety, but not much cash. The most he’d been able to score was a paltry patronage from Prince Karl of Hesse-Kassel.
The next step was clearly (what else?) a full-fledged IPO. Or, what passed for an IPO in those days.
Launching a stock in 18th-century Europe was simple – if you had a personal “in” with the King, and could persuade him to issue you a license to operate as a corporate entity, known as a charter. When the King “chartered” a company, he granted it legal right to exist, and also granted himself the royal right to skim money out of its coffers should the Royal exchequer require it.
As is ever the case with big government, the process of gaining a charter – which included a lengthy, expensive application process and often, an act of legislation – was fraught with difficulty. (After all, with each new royal corporation the King was effectively vetting and commissioning a private bank for himself.)
Only the few, the brave, the very solvent scored a charter. Which left a lot of smaller concerns – like Bessler’s strapped-for-cash perpetual-motion enterprise – out in the cold.
Unless they launched an unchartered company, that is.
Unchartered Waters
Businesses without a royal charter – known as unincorporated joint stock companies – sidestepped dealing with the King and his rules altogether. They just issued their own stock, wrote their own by-laws, and kept whatever money they made for themselves. (Of course, like any enterprise with zero guardrails, this could and did backfire, particularly for shareholders.)
Johann Bessler (never a fan of guardrails) clearly felt more comfortable with option B. In 1720 – as monied patrons for Bessler’s invention continued to be elusive – an ad enticing investors to back an unincorporated joint stock enterprise “for a wheel for perpetual motion” appeared in English papers – likely, helped along by London instrument maker and Bessler fan John Rowley.
But sadly, the new perpetual-motion stock – along with a host of other small businesses, like one “to make salt water fresh” and one “for importing Jackasses from Spain” – never had a chance to get off the ground, let alone return fabulous riches for early investors…
In those days, England’s biggest royally chartered company was the South Sea Company, created by an Act of Parliament in 1711. Ostensibly, its mission was to trade with Spanish colonies, but really, it served as a giant slush fund to replenish the royal coffers after an expensive war.
Unchartered companies – no matter how tiny – siphoned bits of money away from the government’s massive South Sea shell game. And by the 1710s, unchartered stocks were rapidly growing in popularity. So in June 1720, Parliament passed the Bubble Act, which outlawed all unincorporated joint stock companies as a “public nuisance,” due to their crime of conducting business “for their own private Lucre.” (The horror!)
Ironically, the South Sea Company itself proved to be the biggest bubble of all – it collapsed spectacularly in September, just a few months after the Bubble Act outlawed unincorporated stocks. (So much for the relative stability of government-run enterprises.)
As for Johann Bessler, he soon found himself not just a public nuisance, but a pariah. In 1727, his former maidservant, Anne Mauersbergerin, came forward and testified that she’d been the one to turn the wheel via a hidden crank.
Disgraced in the eyes of the scientific community, Bessler abandoned his wheel and retreated to a secluded farm, where he busied himself inventing a perpetual-motion windmill. There was clearly ill luck blowing from some quarter of the compass: in 1745, Johann Bessler toppled into his own windmill and died, leaving more questions than answers.
Bessler’s perpetual motion grift ground to a halt. Surprisingly, though, it wasn’t the end of the road for unincorporated joint stock companies.
Trust, But Verify
Today, royal charters have largely gone the way of the little skirts Victorians used to put around chair legs. Interestingly, the Crown-funded British Broadcasting Corporation (“BBC”) remains one of the last fully government-chartered English companies existing today.
The unincorporated joint stock company, however, took on a robust second life of its own. Under the punitive terms of the Bubble Act, a slew of companies folded… or sought their fortunes elsewhere. By the late 1700s, the unincorporated structure made its way – surprise! – to the uninhibited New World, where it became enshrined in American law as a form of company called the “Massachusetts trust.”
Described in The American Bar Association Journal in 1923 as “the mysterious Massachusetts trust”… with features that straddle the line “between Corporation and Partnership,” it offered a way to pool resources and invest without taxes, and became a popular vehicle for making money, especially in real estate. By the 1920s, the conveniently un-regulated Massachusetts trust had become a tax-shelter vehicle for rich folks like John D. Rockefeller’s brother William, who in 1922 held $7 million in his own Standard Oil stock… and $44 million in tax-exempt Massachusetts trusts.
By then, the U.S. government thought that the Massachusetts trust was just a little bit too good of a deal for investors. (Too much “private Lucre” changing hands, again, it seemed.)
In an eerie echo of the Bubble Act, Morrissey v. Commissioner, the Supreme Court slapped prohibitive tax penalties on Massachusetts trusts – essentially permitting them to be taxed twice. In the late 1950s, one of the largest Massachusetts real estate trusts brought in $519,743 net income… of which federal taxes ate $250,600, leaving only $269,143 available for shareholders.
Unsurprisingly, real estate investment plummeted, and by the 1950s, a worried Congress had realized that tax-advantaged investment in Massachusetts trusts might actually have been a good thing for the economy.
That’s when President Dwight Eisenhower signed the REIT Act of 1960 into law, codifying an updated and somewhat more regulated version of the Massachusetts trust called the Real Estate Investment Trust (“REIT”).
REITS restored the earlier tax-advantage loophole and also added in some benefits like easily transferable shares (meaning these companies could now trade liquidly on the open market, rather than changing hands in back rooms). And, unsurprisingly, they have exploded in popularity – with market cap growing about 17% every year over the past 25 years, and holding about $4.5 trillion in total real estate assets today.
Like their direct forebears, the European joint-stock companies and the Massachusetts trusts, REITs still function as a big “F You” to government overreach, and that is perennially appealing. A kind of perpetual motion machine, as it were.
In this issue, we are recommending one of the most respected companies dealing with REITs.
A Safety Play With Big Upside
This month’s Complete Investor (formerly The Big Secret On Wall Street) looks at shares of a REIT that have a very low level of risk, and that are supported by a huge dividend that is well above almost any fixed-income instrument in the market today.
Normally a low-risk investment like this would offer pretty bland potential upside in return. But the business is at a unique point in the cycle, effectively a trough in conditions that appears poised to move higher in coming quarters. And even if things take longer to turn upward than expected, the dividend yield alone pays investors to wait. This is a rare find in today’s market driven by artificial-intelligence (“AI”) fervor. So let’s look at an actual positively asymmetric risk-versus-reward setup
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