In the last post, I said that the books we will learn about would provide information on three areas of major importance to an investor: the action of markets, investor psychology and methods of investing. Let’s start with markets behaving badly. In 1841 Charles Mackay wrote his classic, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. In addition to discussions of crusades, witch burnings and other forms of crowd madness, he described three instances of financial madness: the Mississippi Scheme, the South Sea Bubble and the tulip trade in Holland. Since the tulip bubble in approximately 1636 is most often cited in popular literature as the poster child for a market gone mad or, more accurately, people gone mad in a market, I have chosen excerpts from the chapter on tulips to share with you. As you chuckle over the antics of the normally sober Dutch back then, substitute “internet companies” for “tulips”. If you tracked the wild markets at the close of the 20th century, you will see that the only difference between the two periods was a separation of 400+ years. The behavior of the people is remarkably similar, as were the ultimately damaging results. Here are excerpts from Mr. Mackay’s work:
THE TULIPOMANIA
Quis furor, o cives!--Lucan
The tulip-so named, it is said, from a Turkish word, signifying a turban-was introduced into western Europe about the middle of the sixteenth century. Conrad Gesner, who claims the merit of having brought it into repute,-little dreaming of the commotion it was shortly afterwards to make in the world,-says that he first saw it in the year 1559, in a garden at Augsburg, belonging to the learned Counsellor Herwart, a man very famous in his day for his collection of rare exotics. In the course of ten or eleven years after this period, tulips were much sought after by the wealthy, especially in Holland and Germany. The rage for possessing them soon caught the middle classes of society, and the merchants and shopkeepers, even of moderate means, began to vie with each other in the rarity of these flowers and the preposterous prices they paid for them.
The demand for tulips of a rare species increased so much in the year 1636, that regular marts for their sale were established on the Stock exchange of Amerstdam, in Rotterdam, harlaem, Leyden, Alkmar, Hoorn and other towns. Symptoms of gambling now became, for the first time, apparent. the stock-jobbers, ever on the alert for a new speculation, dealt largely in tulips, making use of all means they so well knew how to employ to cause fluctuations in prices. At first, as in all these gambling manias, confidence was at its height, and every body gained. Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and one after the other, they rushed to the tulip-marts, like flies around a honey-pot. Everyone imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. Nobles, citizens, farmers, mechanics, seamen, footmen, maid-servants, even chimney-sweeps and old clotheswomen dabbled in tulips. People of all grades converted their property into cash, and invested it in flowers. Foreigners became smitten with the same frenzy, and the money poured into Holland from all directions.
At last, however, the more prudent began to see that this folly could not last for ever. Rich people no longer bought the flowers to keep them in their gardens, but to sell them again at cent per cent profit. It was seen that somebody must lose fearfully in the end. As this conviction spread, prices fell, and never rose again. Confidence was destroyed, and a universal panic seized upon the dealers. Hundreds who, a few months previously, had begun to doubt that there was such a thing as poverty in the land suddenly found themselves the possessors of a few bulbs, which nobody would buy, even though they offered them at one quarter of the sums they had paid for them. Many who, for a brief season, had emerged from the humbler walks of life, were cast back into their original obscurity. Substantial merchants were reduced almost to beggary, and many a representative of a noble line saw the fortunes of his house ruined beyond redemption.
Mackay's entire well written classic describing numerous instances of crowds gone wild is available through several publishers. John Wiley & Co., in its Wiley Investment Classics series, publishes “Extraordinary Popular Delusions and the Madness of Crowds & Confusión de Confusiones” which contains not only the three financial events reported by Mr. Mackay in 1841 and but also Confusión de Confusiones by Joseph de la Vega, who wrote about market manipulation in 1680.
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