April 3, 2015
What was tulip mania and how can it tell us about markets and herd behavior when it comes to investing?
What was tulip mania and how can it tell us about markets and herd behavior when it comes to investing?
Tulip mania was perhaps the first economic bubble based on speculation. Tulips were newly introduced to The Netherlands and their initial price was a normal price. As more people were aware of tulips the demand for them rose. As demand rose people started to see them as an investment instead of as a pretty flower and would bid the prices up ever higher solely for the return and not for the joy of having the flower. Eventually prices rose to ridiculous heights with people paying much more for a tulip bulb that it was intrinsically worth. This type of growth is not sustainable and eventually this was realized and the price of tulip bulbs dropped leaving the people who bought them last broke. This was all possible because some people saw others profiting from buying and selling and assumed they could do the same without understanding why the bulbs were valuable in the first place. If you lose track of why you are doing something you should stop and ask “What is the real purpose of this endeavor?” Similar economic bubbles have happened such the dot-com bubble and the recent real estate bubble. Beware when buying things solely for profit. Understand it’s true value before speculation.
The tulip mania was a major bubble in Scandinavia. There was a genetic mutation in a strain of tulip bulbs that caused unusual coloring and spotting on the flowers. People got interested in these flowers and started buying their bulbs at any price. This started to drive the price of them up, soon everyone was buying them and a bubble formed because people were buying just because everyone was buying. The value of a tulip bulb got up to where you could buy a house with them, or a bulb was worth more than a years wages. You must avoid bubbles and the herd behavior that goes with them. Just stick with no load index funds and you will help avoid a bubble because the index hold so many stocks you were well diversified. That is not to say that a whole sector cant become a bubble such as when the .com bubble was going on. Make sure to hold the whole world economy at the lowest price.
Tulip mania occurred a few hundred years ago in Holland. When tulips were first introduced to the area, the people of the time really liked them, so demand for tulips increased dramatically. This increased demand pushed the price of tulip bulbs higher on an already unique and rare flower. There was then a spreading of a non fatal virus through the plants that altered the tulip population, causing them to grow with more brilliant colors and patterns on their petals. These new plants were even more rare and more highly sought after so the price of tulip bulbs again began to rise. The tulip bulbs did not accurately reflect their true value because people were ‘following the herd’ and buying tulips because that was what everyone else was doing. And, as with any bubble, the prices finally became too high, no one wanted to buy them anymore, people began to sell, and then everyone wanted to sell. This led the price of tulips to decrease dramatically and in a short period of time.
Outstanding everyone! I have nothing to add.