Ouch !.............................................Ouch !
melt down ! A Falling Knife !
SOURCE: Riley Capital Research-
The Riley Report: Tulipmania.com - Excerpts
Every serious investor and student of the rich history of market psychology knows the cautionary tale of the grand dementia that swept Holland in the 1630's: Tulipmania. It is widely regarded as the mother of all bubbles, surpassing the absurdity and egregiousness of all of the other speculative manias that would follow it; such as the Mississippi Scheme and the South Sea Bubble in the early 1700's, the Roaring Twenties American stock market, and gold and the Japanese stock market in the 1970's and 1980's.
Tulipmania likely earned its status as the ultimate financial mania due
to the fact that the object of its desire was a commodity that had never
before (or since) been considered a store of value (unlike gold and
silver) and had no real utility (unlike land and oil). It did, however,
offer the promise of a recurring revenue stream (like business ownership
via common stock) from the sale of cultivated bulbs -- hopefully at ever
higher prices. The height of the bubble wrought by Tulipmania was
breathtaking, with the price of tulips rising by 5900% from late 1634 to
early 1637.
The demand for tulips was so great that by 1636 they were regularly
traded on the Stock Exchange of Amsterdam and on many locals marts in
towns throughout Holland, and for a while they even traded at the
Exchange of London and in Paris. ''Tulip-notaries'' were appointed to
help manage the booming trade. ''Tulip-jobbers'' traded the bulbs for
short-term gains. Futures contracts were created to ensure future
delivery of bulbs at agreed-upon prices.
The mania soon trickled down from Holland's upper class, with ordinary
citizens selling their property and land to reinvest the proceeds in
tulip bulbs. Fortunes were made overnight. The boom created a wealth
effect that ignited inflation in other assets in Holland. The price of
houses, land, horses, carriages, and luxuries of every sort rose
dramatically.
Interestingly, the passion for tulips was mostly confined to Holland. In
Charles Mackay's classic book, ''Memoirs of Extraordinary Popular
Delusions and the Madness of Crowds'', the chapter on Tulipmania
recounts the rather humorous story of a foreign sailor visiting Holland.
The visiting sailor, uneducated in the value of tulips, steals a bulb
from a nobleman's table, thinking it is an onion. By the time the
nobleman catches up with the sailor at the docks, he has consumed the
bulb with his lunch of red herring. The value of the bulb that the
hapless sailor ate? 3000 florin -- an amount that would have paid for 25
fat oxen at the time. The poor sailor spent several months in prison for
his felony.
Alas, it all ended rather poorly once the greatest fool had paid the top
tick. A nagging fear that ''investing'' in tulips had instead become
speculation began to spread. As this fear supplanted greed there were
soon many offers and no bids. Tulip prices fell 93% in the 10 months
after the market peaked. Fortunes were lost, lives ruined, and Holland's
economy was devastated. There was no ''dead cat bounce''. One hundred
years later tulips sold for less than 1/2 of one percent of their peak
prices.
The purpose of this history lesson? Today many market pundits have
likened investors' appetites for anything Internet to those of
Hollanders' for tulip bulbs. Might they have a point?
We do have Tomorrow !
Regards,
R.T |
