Throughout financial history, there have been a lot of booms and busts, euphoria and depression. The majority of investors are always short-term thinking, rushing to the boom. And it is like the simple rule of economics: the early people get a lot of profits, then people who come second get enough profit, but the late comers get nothing, and waste the investment that they have put into the game.
Nearly 400 years ago, there was a bubble relating to the physical asset that a lot of us might have heard about, the tulip bulb. The bubble was so huge that has been named Tulip Mania. In the mid-16th century, the tulip was just being introduced into Europe from the Ottoman Empire, the Turkish Empire which lasted from 1299 to 1923. The tulip flower rapidly became a luxury item and status symbol.
As this kind of flower grew in popularity, the rich and growers agreed to pay higher and higher prices for bulbs. In 1634, speculators began to enter the market. Ordinary bulbs were selling for extraordinary prices, and the very rare bulbs were going for ridiculously high prices. A Viceroy bulb at that time could be exchanged for the package of: a bed, a complete suit of clothes, a thousand pounds of cheese, two lasts of wheat, four fat oxen, eight fat swine, twelve fat sheep, two tons of butter, and four m3 of beer. And an offer of 12 acres of land could be exchanged for one of two existing Semper Augustus bulbs.
Charles Mackay, in Tulipomania, chapter three of his book, "Memoirs of Extraordinary Popular Delusions and the Madness of Crowds," published in 1841, wrote about the frenzy: “Everyone imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney-sweeps and old clothes women, dabbled in tulips. People of all grades converted their property into cash, and invested it in flowers. Houses and lands were offered for sale at ruinously low prices, or assigned in payment of bargains made at the tulip-mart.”
In the time of 1636 – 1637, tulip traders and speculators were making tons of money. They could earn up to 60,000 florins in a month, more than $60,000 in current U.S. dollars.
Looking at the price index like a stock price, we would be amazed at the craziness of people to trade something physical which didn’t produce any earnings and cash flows. The price went up more than 20 times within only a month, and then in February 1637, it began to burst. Earl Thompson's standardized chart for tulip bulbs didn’t reflect the shape of the decline due to the lack of data. But of course there is no doubt that it kept falling like a waterfall.
Even in 1636, the Dutch created a kind of formal futures markets where traders could buy tulip bulbs at the end of the season and those contracts were bought and sold. At that time, the fee that buyers must pay was 3.5% of the contract price. At that time, no party had to post initial margin or mark-to-market margins. However, no contract was delivered because the bubble had burst in the beginning of 1637.
Human always have greed and envy in the blood; it is unchanged forever. It is human nature. The lesson dated back nearly four centuries again reminds us of the timeless investment philosophy with its discipline and high level of patience: Don't follow the crowd. And as Warren Buffett often said: “Be fearful when others are greedy and greedy when others are fearful”.
Nearly 400 years ago, there was a bubble relating to the physical asset that a lot of us might have heard about, the tulip bulb. The bubble was so huge that has been named Tulip Mania. In the mid-16th century, the tulip was just being introduced into Europe from the Ottoman Empire, the Turkish Empire which lasted from 1299 to 1923. The tulip flower rapidly became a luxury item and status symbol.
As this kind of flower grew in popularity, the rich and growers agreed to pay higher and higher prices for bulbs. In 1634, speculators began to enter the market. Ordinary bulbs were selling for extraordinary prices, and the very rare bulbs were going for ridiculously high prices. A Viceroy bulb at that time could be exchanged for the package of: a bed, a complete suit of clothes, a thousand pounds of cheese, two lasts of wheat, four fat oxen, eight fat swine, twelve fat sheep, two tons of butter, and four m3 of beer. And an offer of 12 acres of land could be exchanged for one of two existing Semper Augustus bulbs.
Charles Mackay, in Tulipomania, chapter three of his book, "Memoirs of Extraordinary Popular Delusions and the Madness of Crowds," published in 1841, wrote about the frenzy: “Everyone imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney-sweeps and old clothes women, dabbled in tulips. People of all grades converted their property into cash, and invested it in flowers. Houses and lands were offered for sale at ruinously low prices, or assigned in payment of bargains made at the tulip-mart.”
In the time of 1636 – 1637, tulip traders and speculators were making tons of money. They could earn up to 60,000 florins in a month, more than $60,000 in current U.S. dollars.
Looking at the price index like a stock price, we would be amazed at the craziness of people to trade something physical which didn’t produce any earnings and cash flows. The price went up more than 20 times within only a month, and then in February 1637, it began to burst. Earl Thompson's standardized chart for tulip bulbs didn’t reflect the shape of the decline due to the lack of data. But of course there is no doubt that it kept falling like a waterfall.
Even in 1636, the Dutch created a kind of formal futures markets where traders could buy tulip bulbs at the end of the season and those contracts were bought and sold. At that time, the fee that buyers must pay was 3.5% of the contract price. At that time, no party had to post initial margin or mark-to-market margins. However, no contract was delivered because the bubble had burst in the beginning of 1637.
Human always have greed and envy in the blood; it is unchanged forever. It is human nature. The lesson dated back nearly four centuries again reminds us of the timeless investment philosophy with its discipline and high level of patience: Don't follow the crowd. And as Warren Buffett often said: “Be fearful when others are greedy and greedy when others are fearful”.
