What prompted the research showcased on Tozsdemuzeum.hu?

My interest in long-term yields, i.e., yields spanning decades. These are interesting because there is a well-known question in finance: the so-called “equity premium puzzle,” which is the observation that stocks tend to yield much more over the long term compared to other assets like bonds and deposits. I was curious about why this is the case. Long-term (30-40 year) yields are usually calculated from American data, which doesn’t represent Europe and least of all Hungary. The Hungarian stock exchange, established after the political changes, had a short timeline at the research’s outset, only 26 years. However, it’s known that the former Budapest Commodity and Stock Exchange, BÁÉT, operated for 85 years, meaning there are long-term yields.

In 2016, I began investigating the mystery by assembling the time series and determining the yield of the old Hungarian stock exchange. It quickly became apparent that no such research had been done before. The institution founded by Frigyes Kochmeister started on January 18, 1864, with 13 stocks and operated as a properly organized stock exchange from the start. From the very first day, they issued Price Listing sheets where they published the prices. By 2016, the digitization of printed newspapers had also significantly advanced, so we started collecting and digitizing newspapers and organizing the prices into a database.

How did you start? How was the research material compiled?

First, we researched where the prices were published. We found 3 sources: the Budapest Gazette, which is the predecessor of the Hungarian Gazette, the stock exchange’s Price Listing sheet, which was the official publication, and the Pester Lloyd, a German-language business newspaper. One of the project’s first tasks was to digitize twenty volumes of the Price Listing sheet, thus making it available on the Hungaricana public collection portal. Until 1894, we manually recorded the prices based on the Budapest Gazette, and then we processed the Price Listing sheets using OCR (Optical Character Recognition) technology.

Then, from these sources, we had to build a database. We first had to assess which companies were even on the stock exchange, how many companies there were, how many stocks there were, and we had to collect the dividends and various corporate events like stock splits and mergers.

So far, we have analyzed the period from 1864 to 1913 before World War I. We retroactively set up the index and calculated various types of yields, such as price-weighted yield, equal-weighted yield from 1871, capitalization-weighted yield (since this is when introduced quantity data became available), and also calculated volatility.

We obtained interesting results, indicating that during these fifty years, the yield was higher at home than in other markets: an average growth of 841% per year! This was greater than in London or New York. Additionally, the New York market had higher volatility. This was how successful the economic structure was at that time.

During this period, inflation was not significant, minimal at 0.33%, because currencies were tied to precious metals, which were particularly stable. There were two types of currency then: until 1890, the Austrian value florin, which was tied to silver, and in 1890, the gold crown was introduced, which was tied to gold.

At the end of the opening year of the stock exchange in 1864, trading took place in just 13 stocks. This number then grew more or less continuously until 1911 when 178 stocks were traded. Following this, there was a slight decline, with the number dropping to 175 by 1914. During World War I, the stock exchange was closed, but after reopening in 1919, trading briefly surged again: the highest number of listed stocks was 307 in 1923. Following inflation and territorial losses, the number of stocks started to decline; by 1932, only 161 stocks were traded. Due to the economic crisis, the stock exchange was closed again between 1932 and 1933, and upon reopening, the trading of banking papers was no longer permitted. In 1944, due to World War II, the stock exchange was closed again, with 104 papers available for trading. Upon reopening in 1946, most of these could still be traded, but from then on, both the prices and the number of listed papers started to decline.

And then, how did you proceed? Did you examine the history of the affected companies, how they ended up on the stock exchange?

I realized that I had never heard the names of most of the companies, nor their founders, yet they were very significant people at the time. A good portion of these sank into deliberate oblivion since many stock exchange leaders and founders were affected by the Holocaust, which decimated the membership of the exchange, so they tried to forget and cover up the events. Then, following the subsequent communist takeover, it was also forbidden to talk about the stock exchange, a capitalist institution, so these two events essentially resulted in a lot of information being deliberately forgotten.

Then, the entire price research project transformed into a complete economic history project. Over 85 years, approximately 600 companies and 750 stocks were introduced to the stock exchange. This conceals thousands of stories.

Now, we have set a goal to explore the history of the 100 most significant companies and the associated personalities. That’s why the portal was created, to publish this afterwards. It’s possible that there might also be book-format publications.

G. Tamás Korányi has also processed the history of the stock exchange from a historical perspective and published two books. However, you added a completely new aspect to this story.

Our goal was not to compete with Tamás, whose work I greatly appreciate and have read. Instead, we focused on aspects that had received less emphasis before: the prices, companies, people.

What do you think was the factor during the golden age of the stock exchange that might even motivate a family business to aim for the stock exchange?

For example, it was common practice that if someone received a significant bank loan, then the bank became an owner in the company. They would sit on the board of directors so that they could later value and sell their ownership share by taking the companies to the stock exchange. Now, the Banking Act prohibits banks from acquiring ownership, but at that time, it was very typical, in fact, typically the largest banks had such portfolios, so to speak, they were like investment funds because they were owners in many companies. A remaining part of the research is to explore how these networks formed. It’s already visible through the people, as typically the bank directors were involved in the boards of 10-12 companies to keep an eye on the bank’s share and credit.

Initially, many banks were present on the stock exchange, but after the great stock market crash of 1873, the banks were decimated, practically all of them went bankrupt. From then on, there were significantly fewer, but those who remained on the stock exchange typically survived for quite a long time. Almost the entire story is permeated by three defining banks on the stock exchange: the Hungarian Commercial Bank of Pest, the Hungarian General Credit Bank, and the First National Savings Bank of Pest, founded by András Fáy.

What other sectors were typical of the old stock exchange?

Following the banks, steam mills formed the defining segment, which also pulled in the machinery industry. The railway companies were also on the stock exchange as private companies, many railways were formed until they went bankrupt, and then they were nationalized. This led to the first significant state debt as the railways had to be nationalized, and this was financed by issuing government bonds, creating a substantial liquid market for government papers, also on the stock exchange. After the 1880s, various sectors also started on the stock exchange. Within transportation, it’s worth mentioning the tram and the metro. With the electrification, the first Budapest power supply companies also appeared, while with technological advancements, even pharmaceutical factories emerged.

Additionally, the commodity exchange was incredibly strong. Initially, the Grain Hall was separate, then the two institutions merged. We had the continent’s largest turnover commodity exchange. There were periods when the stock market was closed due to current historical events, but the commodity exchange could operate freely (for example, during the great economic crisis).

And now let’s move on to your story.

In 1997 – after I returned from London (where I studied at the London Business School) – I established a small consultancy firm with two other friends, and we started advising the stock exchange’s business development department. You (Nora), having successfully established futures trading, had just moved from the Market Development department to being a broker at Concorde. We then established the market for futures stocks and dealt with the settlement price manual (since there was a settlement price manipulation scandal), and we handled corporate events. In parallel, we were working on software that aimed to move futures trading to an electronic platform.

We also tried to launch the options market, during which we organized a stock market game developed by a university student boy, with whom we eventually formed a good friendship, so at the end of the assignment, we continued working together and still work together to this day. I started Ramasoft entirely with self-funding from the money earned in the consultancy firm, which started to take off at the end of the 90s.

Ramasoft nowadays deals with risk management and supervisory reporting software. Within this, we are now significant market players in Hungary and are trying to reach beyond national borders. We have already gained some foreign clients and partners, so we not only sell our own software but also bring in international ones. Through these, we also connect to the stock exchange, which has always been a matter close to my heart.

What in your life resulted in you transitioning from a consultant to an entrepreneur?

I studied at the University of Economics, then earned a Ph.D., so for a long time, I considered a scientific university research career. However, it quickly became clear to me that I did not find myself in this because I am more competitive, more down-to-earth. I also hadn’t planned to be an entrepreneur; I imagined my life in an organization, but I realized that wasn’t for me at my first job. Thus, I started Ramasoft, which became sufficiently successful.

What else can be seen on the Tozsdemuzeum.hu site, and what are the future plans?

Our plans include preparing the English version, and we continue to work on developing the stories of significant companies and significant people. We inform those interested in the results through newsletters, to which we happily welcome subscribers.