If you've spent some time reading about investing, odds are you've occasionally run across a reference to tulips. Ever wonder why tulips seem to be the favorite flower of financial raconteurs? Read on.
Hundreds of years ago, 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. 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. There was a lot of talk of tulips in the late 1990s, for example.
You'd think that tulip-mania is relatively ancient history. However, the burned investors in the Novacap Florales Futures Fund know that such plant-based speculation is alive and well in the 21st Century.
History is littered with episodes of financial speculation gone amok with devastating results, and it might benefit us to learn more about these episodes. If we could get better at recognizing today's or tomorrow's tulips, we might avoid losing a lot of money.
To learn more, read Mike Dash's book, Tulipomania: The Story of the World's Most Coveted Flower & the Extraordinary Passions It Aroused. Charles Mackay's book, Extraordinary Popular Delusions & the Madness of Crowds, and John Kenneth Galbraith's A Short History of Financial Euphoria will introduce you to even more instances of speculative frenzies. They're quite instructive, and often amazing.