John Banks was born in Maidstone in 1627 and studied at Cambridge before using his father’s connections to become a successful merchant. He lent money to businesses and the government and took equity stakes in companies including the East India Company. He served as an MP during the dying days of the Commonwealth, but was made a Baronet by King Charles II in 1662. In 1672 he became the governor of the East India Company.
What was his strategy?
While his investment in the East India Company was his most prominent one, the bulk of his fortune came from lending money. He appears to have been an early value investor, buying debt at a big discount to its face value. He also regularly lent money to the Treasury at relatively high rates of interest.
Did this work?
In 1655 Banks was given £11,000 (£1.9m today) as a wedding gift by his father-in-law. Seventeen years later his estate was worth £102,000 (£15.7m), reflecting an annual return of 14%, making him one of the richest men in England. In 1672 the English government defaulted on its debts. Most of the government’s creditors were bankers who had lent money they themselves had borrowed from depositors. They were therefore wiped out. However, Banks had lent his own money, while he had also dabbled in stocks, real estate and cash. As a result, he could negotiate with the Treasury from a position of strength.
The lessons for investors?
Banks’s success in evading a debtors’ prison shows the importance of adequate diversification, limiting your leverage and keeping enough money in liquid assets. Keeping his eggs in several baskets meant that large parts of his portfolio were in sectors unaffected by the bankruptcy. Keeping a lid on his own leverage meant that he didn’t have any creditors clamouring for repayment, while liquidity bought him time to negotiate with the Treasury. The British state has never defaulted again, but investors who have opted for the debt of other countries have found out the hard way that sovereign paper is far from risk-free.