I’m sure that most of you are familiar with the dot-com stock market bubble of the late 1990s, which resulted in a very painful tech stock collapse in 2000 through 2002. Why did that happen? You’ll get as many different answers as you can imagine, everything from “irrational exuberance” to complex explanations of specific stock phenomena. In truth, it comes back to greed and the “herd mentality” of people.
In fact, this “irrational exuberance” has happened over and over again throughout history in all sorts of different investments and financial schemes. And it is here that we meet our tulip-buying Dutchman. You see, tulips in The Netherlands in 1637 were much like tech stocks in the United States in 1999. A single tulip bulb in The Netherlands in 1637 was overvalued to the point that a single tulip bulb sold for roughly fifteen years worth of wages for an average Dutchman, an event called tulipomania. From Charles Mackay’s book on the event (and other interesting ideas), Extraordinary Popular Delusions and the Madness of Crowds:
A wealthy merchant had paid 3,000 florins (note: roughly $125,000 in today’s money) for a rare Semper Augustus tulip bulb, and it disappeared from his warehouse. After thoroughly searching his warehouse, he saw a sailor (who had mistaken the tulip bulb for an onion) eating it. The sailor was promptly arrested and spent months in jail.
Of course, with such madness as this, almost everyone with money began to do the same thingand the vast majority of people who put their money in and did what everyone else was doing lost their shirts.
So what can we learn from this story? Basically, the moral is that following the behavior of everyone else has only one result: serious financial losses. This isn’t merely about stock investing – this philosophy extends into every aspect of financial life. For example, the average American is currently invested in a significant amount of credit card debt, which will only result in them paying out far more money than they take in. Are you going to follow the crowd – or are you going to find your own field of tulips?
This evening, stop by your local florist and look at their tulips. You might even want to buy one as a visual reminder of the fact that it pays to follow your own path.