Introduction to Investing Advice
One word is popping up over and over again in financial news: bubble, bubble, bubble. A bubble in economic terms refers to rapid growth in stock prices driven by market participants. Some are comparing the current trend we see in the securities market to the 2008 housing crisis. Others are comparing it to the 2000 dot-com bust. This may be too short-sighted. To take a look at the best bubble it won’t be from this decade, or even century. Instead, it’s time for a little history lesson from 1637—AKA investing advice from your 10x great grandfather.
The Dutch Golden Age
In the early 17th century, the Dutch were a powerhouse in every aspect from the military to trade to the arts. Early capitalist innovations such as the first formal stock market and the first publicly traded company, the Dutch East India Company, fueled their economic boom. However, with capitalist progress came capitalist outcomes.
One item in particular that grew in popularity was a small flower native to Central Asia: the tulip. It was highly prized by European aristocracy because of its saturated color and vivid patterns. The most coveted tulips were those with stripes on them. A virus within the tulip is, in fact, what caused their rare beauty while the virus also deteriorated their biology, making it hard for them to grow, which added to their allure.
Dutch traders imported tulips from Central Asia with 400% returns per trip. European growers were expanding their operations to accommodate growing demand, and the price of bulbs continued to climb. Eventually, traders introduced futures contracts as a new way of buying and trading bulbs. Essentially, these contracts give the holder the right to buy a commodity at a specific time at a predetermined price. The contract buyer isn’t buying the commodity itself, just the right to buy the commodity. However, the value of the contract can be different from the market value of the asset.
In the 1630s, the true value of the tulips and the value of the futures contracts traded on them were drastically different. The trading of futures contracts on tulips allowed prices to inflate far beyond what anyone would ever reasonably pay for a bulb. People who knew nothing about tulips began trading complex, new financial instruments with the hopes of getting in on the financial boom. This only led the prices to grow unsustainably. A single tulip bulb could now buy a home in the Netherlands. Some estimates claim prices for a tulip reached as high as ten times the average annual laborer’s wage. Starting to sound familiar?
In 1637, the gig was up. People wised up on the absurdity at which the little flowers were trading. Within a matter of weeks, prices of tulips fell more than 90%. The bubble had burst. Those who got in early and got out early made fortunes, while others who staked their future on the boom lost entire livelihoods.
“Tulip Mania,” as it is called, is widely pointed to as the first asset bubble in history. The events that transpired nearly 400 years ago have been repeated countless times since. The lessons from 1637 have countless times been ignored. It’s about time we learn from our mistakes and stop investing in speculative “investments” and start investing in tangible assets with value.
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