Marcel Proust and “stocks for the long run”

French author Marcel Proust (1871-1922) is often called “the greatest novelist of the 20th century.” His masterpiece, À la recherche du temps perdu, is the longest novel ever written, according to the Guinness Book of World Records. It fills several volumes with over 1.2 million words, double the length of Leon Tolstoy’s War and Peace.

Less well known is Proust’s ruinous financial speculations that decimated the fortune inherited from his parents. Yes, he was a reckless risktaker but he also had the misfortune of starting his investing career in 1906, just prior to the onset of World War I and several revolutions.

His experience is an interesting counterpoint to the contemporary orthodoxy that a buy-and-hold philosophy is the way to go. Perhaps the “stocks for the long run” view sounds convincing only because the U.S. economy and military emerged from World War II in a much stronger position than nearly all other countries, which laid the foundation for Pax American and a decades-long secular uptrend in U.S. stocks?  

After his parents died in 1903 (father) and 1905 (mother), Proust began to redeploy their portfolio of blue-chip stocks and bonds, which was held at the Rothschild Bank. The broker was alarmed at the riskier bets and passed the aggressive portfolio over to Lionel Hauser, the same age (34) as Proust.

Since Proust was busy writing articles for magazines and newspapers, as well as authoring books, he was a part-time investor guided by tips received from acquaintances, the media and occasionally Hauser. He was particularly enamored with Armand Yvel writings in Le Figaro’s stock-market column, Le courrier de la bourse.

When Proust started to invest in 1906, he had little idea that World War I and several revolutions were on their way. He was particularly punished by the revolutions in Russia and Mexico. As an illustration of Proust’s misfortune, let’s look at what happened in Mexico.

He used margin loans and futures contracts to leverage his investments in Mexican government bonds (1906), shares of Mexican railways (1908) and the Paris-listed shares of Mexico Tramways Co. (1910). The latter was founded and incorporated in Canada by a group of Toronto-based investors, led by James H. Dunn and Dr. F. S. Pearson.

Proust’s investment in Mexico Tramways stock at a price near 660 francs in early 1910, could not have come at a worse time. A few months after the transaction, the Mexican Revolution erupted, led by peasant and indigenous groups unhappy with the way the prosperity that benefited the middle and upper classes had eluded them and left much land in the hands of foreign investors and rich Mexicans.

President Díaz, who had previously brought stability to Mexico for over a decade went into exile, to be replaced by Francisco Madero, a reform-minded lawyer; Mexican stocks began to sell off. Yvel wrote that Mexico’s stocks would rise again, adding that “clever investors have taken advantage of this situation to buy Mexico Tramways.”

But the revolution intensified. Madero was too moderate for the peasants and indigenous bands roaming the countryside – they especially wanted land reform and redistribution. Madero was assassinated in 1913 and the country was swept up in waves of chaos and violence under the presidency of Victoriano Huerta.

By November 1913, Mexico Tramways stock had tumbled to 400 francs, a drop of 40% from the price in 1910. Proust’s use of margin and futures magnified the losses and wore on his nerves to the breaking point. He asked Hauser to dump his futures – but the futures market had been suspended due to the threat of war in Europe.

The turmoil in Mexico continued into 1915. When General Carranza replaced Huerta as president, Le Figaro reported a rumor that Carranza had been assassinated; it was false but it nonetheless caused Mexican stocks to plunge yet again.

This was the last straw for Proust and he ordered his Mexican Tramway stock to be sold. But no buyers could be found. Months later, the stock was delisted from the French exchange, and could only be sold through a London bank at 150 francs each if the proceeds were reinvested in English bonds, according to wartime restrictions.

It was better than nothing and Proust said go ahead and get rid them. Again, no buyers stepped forward. Finally, after several months, a few of the shares were unloaded, followed by other chunks in subsequent months.

By the time the last lot was ready to be sold, the stock price was down to 100 francs; however, the brokers canceled the order because of new wartime restrictions on international trades. Later, the bank managed to sell the last portion even though Proust had told them just before that he had changed his mind and wanted to keep the shares.

After the sale was completed, the price of Mexico Tramway stock soared as the news on Mexico improved. Proust entered into a long dispute with the bank, calling for the return of the shares since he had told them not to sell. But the bank refused, arguing back that his instructions had been too confusing.

There were similar stories of woe with his holdings in Russia during its revolution in 1917, and in continental Europe during World War I. For investors today accustomed to the past 75 years of peace and prosperity, such catastrophic losses are simply off the radar and out of mind.