Tulip Mania and Today’s Stock Market
“Actions form our character and character directs our actions.”
History has a way of teaching us (or attempting to) the same lessons over and over again.
And, one lesson we all need to keep in mind is the folly of get-rich-quick binges.
One such binge, can be seen in the tulip-mania craze that afflicted staid old Holland in the early 17th century.
What’s A Tulip?
Highly unusual plants called tulips were originally introduced to Holland in 1593 by a botany professor from Vienna. These plants fascinated the Dutch and quickly became expensive, popular additions to their gardens.
The Change
After several years, a nonfatal virus, known as the mosaic virus infected many of the tulips. The mosaic virus caused the tulip petals to develop contrasting colored strips or flames. The Dutch highly valued these infected bulbs and named them “bizarres.” It was the mosaic virus that helped trigger the wild speculation in tulip bulbs.
The Mania Sets In
In a short time, popular taste dictated that the more bizarre a bulb, the greater the price associated with it. A wild speculative fever set in. Soon, the ordinary industry of the country was dropped in favor of speculation in tulip bulbs.
Enormous profits were made! The temptation to join the get-rich-quick crowd was overwhelming. Nobles, citizens, farmers, mechanics, seamen, maidservants and even chimney sweeps dabbled in tulips. People even started to barter personal belongings, such as land, jewels and furniture, to obtain the bulbs that would make them even wealthier.
Government Backing
Even the government, the royal Dutch family, became involved in the speculative fever; converting the vast majority of their holdings to stockpile “designer bulbs” in an effort to “corner the tulip market.”
One Dutch nobleman in fact spent his entire fortune on a particularly unique bulb only to learn that during shipment to England a hungry, uneducated seaman, mistaking the bulb for a variety of onion, sliced, fried and ate it!
The “New Economy”
The bulbs eventually became an actual type of currency. Their value changed from day to day and they were quoted like stocks and shares. During the period 1634-1637, people abandoned jobs, businesses, wives, homes and lovers to become tulip growers. For one Vice-Roi variety bulb a Dutchman paid thirty-six bushels of wheat, seventy-two bushels of rice, four oxen, twelve sheep, eight pigs, two barrels of wine, four barrels of beer, two tons of butter, a thousand pounds of cheese, a bed, clothes and a silver cup!
The Crash
Alas, as happens in all speculative crazes, prices eventually got so high that some people decided on a little prudence and sold their bulbs. Other followed, and soon a snowball effect took hold with bulb prices declining at an ever increasing and alarming rate.
Government Assurances
(You’ll just love this) Holland government ministers, in an effort to stop the panic, stated officially that, “There was no reason for tulip bulbs to fall in price.”
But no one listened.
Dealers and common people alike went bankrupt and in fact, the royal Dutch family saw their entire fortune virtually wiped out.
The Lesson
History repeats itself. On Wall Street we’re seeing a new “mini version” of Tulip-Mania. The ‘90s version was called Internet-Mania.
Internet companies were selling for up to 700 to 800 times earnings (if there are any earnings at all). Day traders were moving in and out of stocks so fast that five minutes is considered a “long time horizon”, and speculation was running rampant.
What To Do
This Investment Advisor’s opinion is that the old fashioned way is still the best way to become rich.
Spend less than you make. Invest the difference. Invest in stable mutual funds with good track records. Add to your investments on a regular and periodic basis and, invest for the long haul.
Speculation can be fun on the way up, but very, very ugly on the way down.
Don’t partake in the tulip craze of the 21st century.
Getting rich the old fashioned way may not be very exciting, but it works!
Invitation
Hopefully, this true story of Holland’s tulip craze of the 17th century both entertained and provided some educational benefit for you.
If you’re not a client yet, and you’d like to explore the option of developing a professionally designed and managed investment portfolio comprised of no-load mutual funds, please give me a call.
I’d be happy to sit down with you and explain how as a fee-only investment advisor I can assist you in meeting your financial goals.
Marshall Sitarik – CFP
Ph. 407-977-3800