Tulips and Investing

Have you ever wondered why the word "tulips" comes up relatively frequently when you're reading or listening to some financial commentary? Here's the explanation.

While the pilgrims were settling down in Massachusetts, people in Holland were bidding higher and higher prices for tulip bulbs. This great "tulipmania" episode of the mid-1600s is one of the first documented cases of speculative investing frenzy. Incredibly, people were taking out loans on their homes to buy bulbs they didn't even intend to plant, but to resell. Prices soared to the modern-day equivalent of tens of thousands of dollars per bulb. 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. There's a 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.

Eventually, the proverbial bubble burst, wiping out many investors.

Today, whenever the stock market is deemed to be getting way ahead of itself, it's often referred to as a "bubble" (about to burst). Likewise, when some people see a certain group of stocks surging higher and higher in value, they may murmur something about how it's just like what happened with tulips.

Fools are hereby advised to stop and smell the flowers, but never to get caught up in reckless financial speculation about flowers, penny stocks, Beanie Babies, and other improbabilities.

You can (and should) learn much more about historical speculation frenzies in John Kenneth Galbraith's A Short History of Financial Euphoria. Lest you be intimidated, know that it's a very short book, and a very readable one, too. In a mere 110 or so pages, Galbraith, who recently passed away, reviews some of history's most outrageous financial missteps and blunders, and we end up just as amazed as he was 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.

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