Mike's Monday Blog ~ Tulipmania: How a Flower Became the First Financial Bubble to Burst

Michael Listmeier

December 02, 2019

MIKE’S MONDAY BLOG

Tulipmania: How a Flower Became the First Financial Bubble to Burst

I’m sure all of you have heard of the tulip; the flower with a vibrant array of colors from red, purple, white or yellow. Tulips flourished in Persia and modern-day Turkey in the 10^th century and people fell in love with the flower. It was later introduced to Europe in the 16^th century and the results were the same.

The location of this craze has its origins in the Netherlands starting around 1633. Prior to 1633, the trade of tulips were available only to professional growers and experts of the flower, but that changed as middle-class and lower-class people were then allowed to tap into the market and begin to trade the flower themselves (1).

Tulips were broken down into categories, mostly down to rarity. In addition to that, a benign virus popped up called the mosaic virus which turned the petals of the flower multicolor, only making those infected with the virus rarer, and thus, more expensive (2). The demand for these flowers quickly began to soar and soon the supply could not keep up, making the price skyrocket.

The mayhem peaked in the winter of 1637. At this point, people were hooked to the tulip trade because the price of the tulip kept climbing no matter what (sound familiar?). It got to the point where people would literally sell their homes to purchase tulips because it was a sure thing. Eventually, like every other financial bubble, it was popped and the entire tulip market crashed which left so many people bankrupt and pondering what went wrong.

To me, this is a fascinating example of the psychology of human-beings when it comes to these types of situations. One can’t pinpoint the moment when this happens, but there is always a moment when people’s common sense and objectivity flies out the window. I suppose it can be attributed to our inner greediness, living in the moment, and trying to make a quick buck, but the ramifications for such logic (or lack thereof) can literally make you penniless.

What’s interesting about financial bubbles is that we simply do not learn—the old adage ‘history doesn’t repeat itself, but it does rhyme’ is all too true. Since Tulipmania, we have seen the South Sea Bubble of the early 1700’s in which even Sir Isaac Newton got it wrong and lost everything (4), the immense speculation that went on before the US market crash of 1929, the Japanese stock market bubble of the early 1990’s (interesting to note that their markets have yet to surpass the market bubble top, and it’s been nearly thirty years), the tech bubble in 1999-2000, the financial crisis of 2007-2008, Bitcoins rise and subsequent fall from just a few years ago.

You hear a lot of chatter on the news of the next market downturn, where the next bubble may rear its ugly head, etc. Anyone who tells you that they know the answer to this question, and when it will take place, is almost certainly selling you snake oil. To be able to foresee such crises is few and far between to say the least.

Remember, they say slow and steady wins the race. I believe time is the most valuable asset we all have; use it to your advantage and let the potential power of compound interest take hold of your money. That way, you may be able to simply watch from the sidelines during a financial bubble and feel you’ve made the right long-term decision for your financial future.

I want to extend a big thank you for taking the time and reading my weekly blog. If you have any questions or would like to schedule a sit-down meeting to discuss more of your financial future, please contact me at 610-374-6249 x114 or visit my website mlistmeier.wradvisors.com

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_{Photo Credit: https://unsplash.com/photos/Raz3_ocwRl0}

_{This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. All investing involves risk, including the potential loss of principal. (11/19)}