Imagine you're telling your children a fable, hoping to impress upon them the importance of resisting the urge to jump onto a speculative bandwagon. Perhaps it begins like this:
Hundreds of years ago, in a place sort of far away, people became very interested in peacock feathers. Sure, these items had been around for a while, but all of a sudden, people craved more and more. It wasn't enough simply to admire the one feather that adorned your bonnet or the vase full of feathers over a neighbor's mantle. Peacock feathers became a status symbol, and people sought them out, paying top dollar for them.
This was good news for the peacock-feather industry. Those who raised, plucked, and traded in peacocks and their feathers started buying fancy jewelry, bigger houses and luxurious furniture. Soon, the feathers had turned into investments. People had noticed how the price of peacock feathers was relentlessly rising, so they began snatching up whatever feathers they could. No one wanted to be left out of this incredible rally. Even people of modest means took out loans on their homes and sold whatever belongings they could to buy a feather or two.
Then one day everything changed. Just as suddenly as it had begun, the interest in peacock feathers began to wane. No longer was a feather reliably fetching a higher price than had been last paid for it. In fact, a panic rapidly developed, as people tried to unload their feathers at any price. The aftermath of the feather frenzy was that a lot of people lost almost everything they ever had.
Now let's return to present-day Fooldom for a bit. Having read the above, does it seem a mere child's tale? Do you think it's representative of hyperspeculation, but greatly exaggerated? Well, if you're a student of financial history (which I'm not, but let's pretend I am), you might have recognized the scenario described above as none other than "Tulipmania."
If you're at all like me, you've frequently heard mention of the legendary Tulipmania of long ago. But you're not exactly sure what it refers to. Sure, it's clearly become a metaphor for wild speculation -- but why? And how? TMF Movie recommended a book to me that explained it all (and more). And I hereby recommend it to you. It's John Kenneth Galbraith's A Short History of Financial Euphoria, available via Amazon.com or perhaps at your local library or bookstore.
In a mere 110 pages, he reviews some of history's most outrageous financial missteps and blunders, and we end up just as amazed as he is at how history repeats itself, without people ever really learning the important lessons. In the case of speculative frenzies, he points out that in desperate searches for someone or something to blame for every bubble burst, no one ever blames the wild-eyed speculator. How true.
Before closing, let me impart a few incredible facts about Tulipmania, for those who aren't too familiar with it. It occurred in the mid 1600s in, you guessed it -- Holland. Galbraith expresses some wonder that the speculation of the times didn't settle on real estate or magnificent Dutch paintings, but on tulips: "Nothing more improbable ever contributed so wonderfully to the mass delusion here examined."
The story is pretty much the same one as I described in my fictitious feather fable above. By 1636, a tulip bulb originally worth very little would fetch "a new carriage, two grey horses and a complete harness." This wasn't even the peak. These bulbs often weren't even planted -- just exchanged for higher and higher prices. Galbraith retells a painful story of a foreign visitor in a Dutchman's house mistaking a tulip bulb worth $25,000 to $50,000 for an onion and eating it. Ouch.
Fools are hereby advised to stop and smell the flowers, but never to get caught up in reckless financial speculation about flowers, penny stocks, beany babies and other improbabilities.