The Dutch Tulip Mania
The worst thing you can do for your financial health is invest or work in an area that you know absolutely nothing about. Success
in our modern economy relies on specialization of all of us as we work in our chosen craft. What happens when large groups of individuals in the public who know absolutely nothing about the stock market come and go en masse?
The answer is a public dog pile into and out of the market creating massive bull and bear markets. This has been happening since the dawn of time in one way or another.
Here is an excellent example of a documented Dutch tulip bulb craze centuries ago where the public dog piled into — and later, out of — a hobby flower market.
In Holland a “tulip mania” occurred that has been extensively studied by psychologists, economists and stock market observers. This is a truly unbelievable story that actually happened many centuries ago — and still happens every day in our stock markets in one or another equity issue or part of the globe. Just like tulip bulbs centuries ago, single stocks routinely go from record low to record high prices in the stock markets on all of our stock exchanges around the world.
In 1559 Conrad Guestner brought the first tulip bulbs from Constantinople to Holland and Germany where almost everyone fell in love with them. Tulip bulbs soon became a status symbol for the wealthy because they were beautiful and, more importantly, hard to get.
Early bulb buyers were people who truly prized the lovely flowers, but after prices took off, people began to speculate on the possibility of further price increases. These were the same type of people who knew nothing about flowers, just like the people who were attracted to the massive 1920s bull market who knew nothing about stocks except that they thought they were going to make some very quick money.
The inexperienced tulip bulb “investors” created a high volume of buying and selling activity, and eventually, tulip bulbs were placed onto the local stock market exchanges. By 1634, the rage over owning tulip bulbs had spread to the middle classes of Dutch society and even merchant shopkeepers began to compete with one another for single tulip bulbs.
How crazy did it get? At the height of tulip mania in 1635, a single tulip bulb sold for a basket of all the following vital consumer goods worth nearly $35,000 today: 4 tons of wheat, 8 tons of rye, 1 bed, 4 oxen, 8 pigs, 12 sheep, 1 suit of clothes, 2 casks of wine, 4 tons of beer, 2 tons of butter, 1,000 pounds of cheese, and 1 silver drinking cup.
Can you imagine spending $35,000 for a single tulip bulb? I sure can’t. But I couldn’t imagine spending the kind of money people were on start up internet stocks at the end of the 1990’s, either! This was happening routinely in Holland in the mid-17th century! It got so out of hand that people were selling everything they owned — their homes, their livestock, every- thing — for the privilege of owning tulips, on the expectation that the bulbs they bought today would be worth a lot more tomorrow. As a result, tulip prices (in today’s dollars) ranged from $17,000 all the way up to $76,000 per bulb. By 1636, tulip bulbs were traded on the Amsterdam stock exchange (along with shares of stock in the Dutch East Indies Company) as well as other stock exchanges in Holland and Europe.
Popular interest in tulip bulbs had shifted from hobbyists and collectors to inexperienced public investors and gamblers. People from all walks of life liquidated their homes and real estate at low prices in order to speculate in tulip trading — just as people jumped into the end of the equity bull market at the end of the 1990’s.
Tulip notaries and clerks were appointed to record transactions, and public laws and regulations were developed to control the tulip craze. In 1636, inexperienced public investors began to liquidate their tulip holdings. Tulip prices began to weaken, slowly at first, and then rapidly. Public confidence was soon destroyed, and panic seized the market. Within six weeks, tulip prices crashed by 90% — the market bubble burst. Defaults on contracts and liens on tulip bulb speculators were widespread. The market crashed soon after, leaving many families bankrupt — the heavy yet consistent price of financial inexperience throughout time.
– Doc Brown
BIO: Doc Brown is a national expert on the stock market. His courses “How to Make a Million Dollar Portfolio from Scratch” at the Oxford Club is a national bestseller. Dr. Brown’s research appears in some of the most prestigious academic journals in the field of finance. See Journal of Financial Research and Financial Management. Scott is an associate professor of finance in the Graduate School of Business at the University of Puerto Rico.
TRAP: Con artists target people in cities and small communities with Ponzi scheme high-yield investment programs. Once they take your money, they leave your legal jurisdiction and there is not a thing you can do about it. If it sounds too good to be true or if you really don’t understand some supposedly high-yield investment program, then just say, “NO!”
FURTHER READING: Mackay, C., “Extraordinary Popular Delusions and the Madness of the Crowds,” Richard Bentley Publisher in Ordinary to her Majesty, 1841, pp. 89-97.
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