The Tulip Bubble          

                                  
Much has been made of the tech stock bubble bursting over the last two years – and rightly so I suppose. But as we study behavioral finance we see that this is a phenomenon not peculiar to our time period or even our culture. (Which once again proves the idea that human nature has been and always will be the same – this is good for prudent investors by the way.)

In 1593, events were put in motion in Holland that led to one of the most spectacular get-rich-quick binges in history. A Vienna botany professor brought a collection of unusual bulbs to Holland that had originated in Turkey. Over the next decade, the tulip became a popular but expensive item in Dutch gardens. These flowers were stricken with a non-fatal virus known as mosaic. The virus caused the tulip petals to develop colored stripes which led to wild speculation in tulip bulbs. Popular taste dictated that the more bazaar the bulb, the greater the cost.

"Tulip mania" had set in. Bulb prices rose out of control. The more expensive the bulbs became, the more people viewed them as smart investments. The ordinary industry of the country was dropped in favor of speculation in tulip bulbs. Everyone imagined that the demand for tulips would last forever and that people all over the world would pay any price for them.

People who claimed prices could not possibly go higher watched their friends make enormous profits. The temptation to join them was irresistible and few Dutchmen sat on the sidelines. In the last years of the tulip craze, which occurred from 1634–1637, people bartered their personal belongings, land, jewels and furniture to obtain the investment vehicle that would make them rich.

As happens in all speculative crazes, prices eventually soared so high that some people decided they should sell. Soon others followed with a snowball effect. Panic reigned in no time. The government stated officially that there was no reason for tulip bulbs to fall in price – but no one listened. Dealers went bankrupt and most bulbs became worthless – selling for no more than the price of an onion.

It is readily apparent, the comparisons that can be made between this historical event and those we have experienced recently. How do investors avoid the doom of past mistakes? The answer is in the question itself – we become investors and not speculators.

 
 

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