If you’ve ever been tempted to follow the crowd when it comes to investing, thus shirking your responsibility to research and understand the asset on your own first, here’s a good bit of advice. Don’t. Crowds normally haven’t a clue about what they’re doing and, by the time they’re drawn like a moth to the flame, there’s nothing left but to get burned. For a lesson in the madness of crowds, let’s turn to 16th and 17th century Holland and the tulip bulb mania. Your eyes do not deceive you – tulip bulbs were the perfect example of an “investment” craze driven by nothing but speculation.
Here’s how it went down. In 1559, a gentleman by the name of Conrad Gestner brought the first tulip bulbs into the area. People went nuts over them. Before long, the tulip bulb had become a status symbol for the wealthy and privileged. The first wave of buyers probably did truly love the flower for its appealing qualities, but it wasn’t long before speculators saw a chance to make money, creating an unfathomable price. In fact, the year 1635 saw a single tulip bulb sell for the following:
This entire list of items was paid for a single tulip bulb, a price approaching $35,000 in today’s dollars. People were trading everything they owned – house, clothes, furniture – for the privilege of owning a tulip bulb. But, as we mentioned, they were buying only in the belief that the price would go up even more in the days and weeks to come, allowing them to re-sell for profit. By 1636, tulips were listed on the Amsterdam Stock Exchange. Public laws and regulations were developed to guide the manic industry. But that same year saw many tulip owners begin to liquidate their holdings. Before long, price had dropped 90%, creating financial devastation for speculators holding contracts; contracts which Amsterdam courts said equated to gambling and were unenforceable under Dutch law. From a high of $76,000 in today’s dollars, the tulip bulb price crashed, over the course of six weeks, to about a dollar each.
The moral of this story. Don’t speculate in “tulip bulbs,” even if they go by a different name and are listed on the New York Stock Exchange. Get rich quick is not a godly investment strategy.
The Solomon Success Team
Flickr / Kivanc Nis
Tags: speculative investing