I was over my parents a few weekends ago; while I was in the basement, I stumbled across an old book that I read when I first started in the wealth management field back in 1998.
The book’s name is called “Devil Take The Hindmost: a History of Financial Speculation” by Edward Chancellor. I was flipping through pages, and I came across one of my favorite stories about investment speculation, Tulipomania!
Tulipomania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed.
Source “Tulip price index1” by JayHenry – Own work from data of Thompson. Licensed under CC BY-SA 3.0
At the peak of tulip mania, in March 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble (or economic bubble). However, some researchers have noted that the Kipper- und Wipperzeit episode in 1619–22, a Europe-wide chain of debasement of the metal content of coins to fund warfare, featured mania-like similarities to a bubble. The term “tulip mania” is now often used metaphorically to refer to any giant economic bubble (when asset prices deviate from intrinsic values).
On February 3rd, 1637, the tulip market suddenly crashed. There was no apparent reason for the panic except that spring was approaching when delivery fell due, and the game would be up. In Haarlem, the flower trade center, rumors circulated that there were no more buyers, and the next day tulips were unsaleable at any price.
Whether it is the tulip craze, dot.com bubble, or financial bubble, speculation will always run rampant in our society. That is why it is so essential to build and manage your portfolio based on academic framework and theories and not get involved in speculative investment bubbles.
Sounds easier said than done, right? Even I get caught up in speculative hobbies; you would cringe when you hear of the prices I paid for some Vinyl records that I “just” had to have. Tell us about some of your speculative purchases or hobbies.