One the books known to many people is Moby Dick the famous story about the hunt for a Great White Whale. There is a new Hollywood movie about the hunt called In the Heart of the Sea and it shows the sea is not always pleasant and calm. For many people we have memories and desires to be on the water when it is pleasant and calm and filled with adventure. The sea can be rough, but why did people go on a ship to try to catch whales?

The answer can be varied, but for the owners it is money, there is gold to be made in the whale oil. Prior to electric lights, whale oil was used to give light to homes, as well as the whales offered other products. This high demand according to the Economist on January 1 helped earned a company called Gideon Allen & Sons a whaling syndicate based in New Bedford, Massachusetts a return of 60% annually. Between 1817 and 1892 overall returns averaged 14% a year.

New Bedford was not the only whaling port in America; nor was American the only whaling nation. Yet according to a study published in 1859, of the 900 whaling ships or the seas, 70% were American and 70% of those came from New Bedford. What was so special about New Bedford? A place a hours drive to Boston. The merchants had developed a new business model that was extremely effective at marshalling capital and skilled workers despite the immense risks involved for both. The model is similar to the high tech model of today.

The model was the Managers held big stakes in the business, giving them every reason to attend to the interests of the handful of outside investors. Their stakes were held through carefully constructed syndicates and rarely traded; everyone was financially at least on the voyage. Payment for the crew came from a cut of the profits, thus decision making could be delegated to the point where it mattered – to the captain and crew.

At the top of the hierarchy was the agent or agent firms such as Gideon Allen who were responsible for the purchase and outfitting the ship, the hiring of the crew and the sale of the catch. Captains ran the show while the ship was at sea and often put in capital as well. Investors received 2/3’s of the profits, the rest was divided among the crew in what was known as the lay system. A capital may receive a 12th lay or one twelfth of the profit; a crew member would receive 1/300 or 1/777 whatever they could haggle .

For the agents, the firms invested in multiple expeditions. The reality is out of 787 boats launched from New Bedford 272 sank or were destroyed. However the ones that came back paid well and many agents were millionaires. You can still see the model being used today.

Linking to dividend paying stocks, when you invest you want to earn more than leaving your money in the bank and there is risk attached. The risk can lessened if you invest in profitable companies and let them do the heavy work. Investing in profitable companies allows diversification across the economy and as long as the companies remain profitable they can be held. As the companies go through their business cycles it is entirely possible to switch to alternative companies and use the dividends to buy the good companies at lower prices.

There are more questions than answers, till the next time – to raising questions.