Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Don't Let the Stock Market Play You For the "Greater Fool"

InvestorEducation / Learning to Invest Oct 02, 2012 - 07:16 AM GMT

By: Money_Morning

InvestorEducation

Best Financial Markets Analysis ArticleWilliam Patalon writes: More than a decade has passed since the dot-bomb implosion, and many of us are still amazed that so many investors got sucked into such an insane speculative financial mania.

The thing is, it has happened many times before.

For instance, in the mid-1600s Holland literally drove itself to ruin over flowers - tulips, to be precise.


Referred to today as Tulip Mania, Tulipomania, or Tulpewoerde, it was the first recorded speculative mania in modern history.

Indeed, the financial frenzy that unfolded between 1634 and 1637 crashed so hard that it actually helped smash the Dutch economy, transforming one of the world's first superpowers into an economic backwater.

Writing nearly 200 years later in his classic work, "Memoirs of Extraordinary Popular Delusions and the Madness of Crowds," historian Charles MacKay said:

"In 1634, the rage among the Dutch to possess [tulip bulbs] was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, engaged in the tulip trade. As the mania increased, prices augmented, until in the year 1635, many persons were known to invest a fortune of 100,000 florins for the purchase of 40 roots."

For some context, the annual income of a middle-class urban family in Holland was 200 to 1,000 florins. (University of Kansas Prof. Mark Hirschey estimated that peak prices for tulip bulbs ranged between $17,000 and $76,000 apiece in today's money.)

Tulip Madness Takes Hold

Like most manias, Tulip Madness took hold during a period of prosperity, when credit was easy to obtain. The Netherlands had the world's most powerful navy, accounted for half the world's shipping trade, was a center of science and, with artists like Vermeer, was also the cultural center of Europe.

The country was newly affluent and tulips, which had come to Europe in the late 1500s, were difficult to obtain and became a way to flaunt that wealth.

Naturally, the DeVries wanted to keep up with the Van Dijks, and tulip prices began their upward march.

It wasn't long before tulips with variegated color patterns (caused, ironically, by a nonlethal virus), became the most valued. Cultivators scoured their gardens hoping for "a strike," which was akin to hitting the lottery.

As MacKay relates, it wasn't long before the business of Holland became, well, tulip bulbs.

By 1636 regular tulip "marts" were established on the Amsterdam Stock Exchange, and in such centers as Rotterdam, Harlaem, Leyden, Alkmar and Hoorn. Grading systems were established - the more striking the pattern, the higher the price.

Theft became a problem. And so did market manipulation.

The get-rich crowd descended on the "market" - the stock jobbers, promoters and profiteers, who goosed prices just like the pump-and-dumpers do with worthless penny stocks today.

Market riggers would even sometimes release specially trained animals (pigs were a favorite) into rivals' tulip fields to dig up, eat and flat-out destroy tulip bulbs - eradicating competition and creating sudden shortages.

Serious tulip "investors" employed messengers to deliver updates on marketplace changes.

Futures markets were created and speculators wrote contracts they had no intention of honoring; they'd just flip the contract to the next "Greater Fool" and pocket the profit.

The rich and the regular speculated together, with some selling homes and farms - often at fire-sale levels - to raise cash for tulip speculation.

All the while, prices rose - even soared. At one point, tulip prices were doubling every day.

No More "Greater Fools"

Needless to say, this couldn't continue. With most of the country's population all in, there were no more "Greater Fools" to sell to.

In the early autumn of 1636, the prudent - or perhaps the "insiders" - began to sell their tulip holdings. Prices hesitated, fell a bit, seemed to stabilize, and then fell some more.

The decline steepened, and finally prices collapsed - dropping about 90% in six weeks. Defaults, margin calls and liens were the order of the day.

Traders beseeched the government to step in, but the request was met with an order to "settle it amongst yourselves." When no agreement could be reached, leaders agreed that all contracts negotiated at the mania's height were null and void.

Prices continued to fall, and the courts refused to honor tulip-related debts, since these were actually viewed as gambling debts, and therefore weren't liabilities in the eyes of the law.

Stock jobbers tried to reignite Tulip Mania, first in Holland and then in other places in Europe, but were unable to do so.

The Netherlands was never again the world leader it had once been.

One final footnote: As Prof. Hirschey noted in a research paper "How Much is a Tulip Worth?" the price paid for a single Viceroy tulip bulb at the height of the mania was $34,584. Today, horticulturists purchasing bulbs of particularly rare varieties of tulip might pay 30 cents to 40 cents each - or what the bulbs sold for after the collapse of Tulip Madness.

I wanted to tell you this story today because it's one of my favorite investing lessons.

My co-author - top-tier money manager Anthony Gallea - and I wrote about Tulip Mania in our 1998 book "Contrarian Investing: How to Buy and Sell When Others Won't and Make Money Doing It."

It's a great story because of the valuable lessons to be learned.

The most important: Avoid being the "Greater Fool" by searching out solid investments and constructing a well-thought-out portfolio.

That's our mission here at Private Briefing where we've already shown more than 14,000 investors how to invest and profit - but without becoming the next "Greater Fool." To learn how you can join our group, just click here.

With the benefit of hindsight, it's easy to see that the most disastrous mistakes that investors make - like laying out your life savings for a tulip bulb, or an Internet stock - should be the easiest to avoid.

But in the heat of the moment - in the pursuit of profits - it becomes surprisingly difficult.

We can show you how to reach life's destinations - richer and less stressed.

Source :http://moneymorning.com/2012/10/02/dont-let-the-market-play-you-for-the-greater-fool/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in