The markets are truly scary right now. Global credit has all but frozen. Stocks around the world are tumbling. And to make matters worse, governments and central banks are trying to ‘fix’ the problem with massive interventions.

But for investors with “a clear head and a keen eye for opportunity” boldness can pay big dividends.

Taipan Daily editor Justice Litle says there are five proven strategies for building wealth… regardless of whether the bulls or the bears are in charge. 

Strategy #1: Superior Information

One of the oldest and most successful wealth-building strategies hinges on superior information — learning something important before everyone else.

In today’s hyper-connected and heavily regulated markets, it is much harder to come by superior information (without a keen willingness to break the law). But back in the 18th and 19th centuries, no one played the superior information game better than the Rothschilds.

The Rothschilds were known for maintaining an extensive (and secretive) information network, connected by financial hubs in five European cities: London, Paris, Vienna, Naples and Frankfurt. Nathan Rothschild, a bullion dealer on the London Stock Exchange, made legendary use of this information network during the Napoleonic wars. This network laid the foundations of the Rothschild fortune.

Richard Bookstaber recounts the backstory in his book, A Demon of Our Own Design:

By the end of the final hour of the battle of Waterloo on June 17, 1815, just 10 hours after first contact, a quarter of the Duke of Wellington’s troops lay dead. The French losses numbered nearly 30,000. Within the space of half a day, Waterloo claimed more casualties than any other battle in history.

Given the communications limitations of the period, Great Britain could not immediately know about the carnage of Waterloo or the swift victory… Wellington’s Envoy, Major Henry Percy, was dispatched to send the news of the victory to the War Office in London, but he and his horse were affected by the physical toll of the battle.

Even with his best efforts, he did not arrive until late on the night of June 21. Until that time, all of Britain waited in suspense — all of Britain but one man, Nathan Rothschild.

Because the Rothschilds were known for having superior information — and because he had made a show of stopping by the prime minister’s house on the way — all eyes were on Nathan Rothschild as he took up his usual post at the London Exchange.

England’s victory was a hugely bullish event. Nathan Rothschild knew this full well. But rather than buy British consols (the main trading vehicle of the day), Nathan began to sell.

The heavy selling was a very loud — and very false — signal. Rothschild’s bearish actions fairly shouted, “Britain has lost! Napoleon has won! Abandon all hope…”

Of course, it was the exact opposite that had actually happened. So once everyone had panicked out of their positions, and the market hit rock bottom, Nathan Rothschild turned around and began to buy. And the family made a spectacular killing. Nathan Rothschild’s masterstroke was twofold: He knew how to acquire superior information, and he knew precisely how to use it.

Strategy #2: By Hook or by Crook

For a thousand years — from roughly 800 AD to 1800 AD — the Rhine River in Europe served as a revenue source for the Holy Roman Emperor and his minions. Cargo ships were required to pay tolls at various points along the Rhine, providing a sort of interstate tax revenue on traded goods.

The Raubritters, or robber barons, were originally renegade feudal lords who levied unjust tolls on these passing ships (to the great annoyance of the emperor and the church). The term “robber baron” was later resurrected in 19th-century United States and applied to the financiers and captains of industry who had amassed huge sums by ruthless means.

Few of the latter-day robber barrons were as successful, or as hated, as Jay Gould.

In the aftermath of a failed gold corner, which in turn led to the Panic of 1869, Gould was dubbed “the Mephistopheles of Wall Street.” In addition to being a railroad titan, Gould was known for being one of the most manipulative, cunning and creative financiers in history. His strategic maneuvering included bribery, bankruptcies, lawsuits, insider trading, stock manipulation and much more.

One of Gould’s favorite techniques was the “bear raid,” in which a company’s shares would be hammered into the ground with strategic selling. This allowed Gould to then step in at rock-bottom prices (precisely when the selling onslaught stopped), wrest control from the board, and establish himself as chairman or president. Many of the maneuvers Gould pioneered would inspire the formation of the Securities and Exchange Commission (SEC), created some 40-odd years after his death.

In his book Dark Genius of Wall Street, Edward Renahan describes how it was done:

Jay Gould would transact virtually all of his Wall Street business for the balance of his short life through a series of special partnerships with a variety of brokerage firms. This device allowed him the luxury of trading anonymously whenever he cared to, and of trading on both sides of a speculation through different brokers. Eventually, Jay would spread his business over so large a network of Wall Street houses that he became something of a phantom; ever present, but frequently invisible and always inscrutable.

In light of his larger-than-life reputation as a heartless crook (still stoked by books and news articles to this day!), Gould never really received credit for the positive things he achieved. Dirty dealings aside, Gould’s business acumen greatly aided the expansion and development of America’s railroads, thus aiding the dramatic long-term expansion that followed.

Even Mephistopheles had some good in him it seems…

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Strategy #3: Looking to the Future

Claude Shannon, the brilliant scientist of Bell Labs fame, was perhaps best known as the father of “information theory”… an idea so big it is almost impossible to overstate its influence. Wikipedia captures some of the magnitude:

[Information Theory] is at the crossroads of mathematics, statistics, computer science, physics, neurobiology, and electrical engineering. Its impact has been crucial to success of the Voyager missions to deep space, the invention of the CD, the feasibility of mobile phones, the development of the Internet, the study of linguistics and of human perception, the understanding of black holes, and numerous other fields.

As if being the father of information theory were not enough, Shannon did still more. In the late 1930s — a decade before revealing his famous theory — Shannon hit on the idea of the digital computer, using Boolean algebra to prove that any problem could be solved with electrical circuits. This led to the 1s and 0s system of binary computing in use today.

Shannon’s discoveries meshed together beautifully. The 0s and 1s made digital computing possible, while information theory enabled the means of sending digital information across great distances without garbling the transmission.

As far as digital technology goes, Claude Shannon basically cracked the philosopher’s stone. In terms of brilliance and influence, many rank Shannon above Einstein for this reason (plus the follow-on impact of Shannon’s ideas on the everyday world).

Just as a great scientist should be, Shannon was deeply playful. He loved to tinker with Erector Sets and odd materials, and was known to juggle in the halls of Bell Labs while riding around on a unicycle. (He invented one of the first computer chess programs and one of the first artificial intelligence devices, among other things.)

One of his quirkier inventions was a cigar-shaped box with nothing but a switch on one side. On flipping the switch, a mechanical hand would come out, flip the switch off, and retreat back into the box again.

We mention Shannon here, though, because he was a wildly successful investor. In his book Fortune’s Formula, William Poundstone recounts Claude Shannon’s view of markets. “You know the economists talk about the efficient market where everything is equalized out and nobody can make any money really, it’s all luck and so on,” Shannon once said. “I don’t believe that’s true at all.” (Hear, hear! Neither do we.)

Given his track record, Shannon had good reason to doubt the academics. Poundstone notes that Shannon’s performance even stacked up against the Oracle of Omaha’s:

When Warren Buffett bought Berkshire Hathaway in 1965, it was trading at $18 a share. By 1995 each share was worth $24,000. Over thirty years, that represents a return of 27 percent. From the late 1950s through 1986, Shannon’s return on his stock portfolio was about 28 percent.

As of record books in the early ‘80s (just before the great equity bull market took off), Claude Shannon had the majority of his investment account in one stock, Teledyne, that he had purchased for just $1 per share. In 1981, this $1 stock was worth $194.38 per share… a nearly 200-fold return.

Even more impressive from an ROI (Return on Investment) standpoint were Shannon’s returns on Hewlett Packard (HPQ) … a stock he had purchased at just 13 cents per share. The Shannons had a 63,000% return on Hewlett Packard as of 1981. Given Shannon’s deep aversion to selling companies he believed in, that return no doubt grew even more impressive in the years that followed.

Claude Shannon not only invented the future, he and Betty (his wife) invested heavily in it.

But rather than take a cerebral, formula-laden approach, as one might expect, the brainy Shannons were the type of common-sense investors who would, say, sample a piece of Kentucky Fried Chicken before buying stock in the company. (They actually did that.) The Shannons looked to the future, bought companies they believed in… and held on tight.

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