Stock market bubbles have formed time and time again, but here are some interesting facts about the one considered the oldest.
This well-known pattern of stock market bubbles has been repeated again and again over the last hundreds of years, and can be divided into ,4 stages:
This is where the cautious money starts to invest. Future returns are not guaranteed and so this is a high-risk investment, usually by those with specialist knowledge and an insight into the market in question. The general population is unaware of the opportunity at this stage. As prices start to slowly rise, positions and investors increase.
Momentum starts to build as investment increases and price rises. There might be one or more small sell-offs as early investors cash-in and bank their profits. Longer-term investors use these dips as a way to add to their positions. Reports start spreading of this new opportunity and the market attracts less sophisticated investors.
This phase is fuelled more by psychology than logic and prices are inflated by a huge increase in investors from the general population. Everyone wants in on the opportunity and prices are artificially elevated, with little perpspective on the true value of the commodity. As the new price is seen as normal, sophisticated investors are starting to quietly sell and get out of the market.
4. Blow off
Most often, some sort of trigger, or realisation that the asset is grossly overvalued, will cause a rush to sell. Some hype still remains and there can be a bounce up as some see an opportunity to buy on the dip. Futher selling continues, however, and buyers have all but disappeared, causing a panic that will often bring price down to well below the mean. The public have given up while some sophisticated investors buy at this cheapest price.
The Oldest Known Stock Market Bubble
Tulipmania, or the Dutch tulip mania, is generally considered to be the oldest stock market bubble. Here are 10 facts about it:
1. Tulips came to Europe in the 1500s, along with tomatoes, peppers and potatoes.
2. Prices started to rise in 1634 and the crash (blow-off) happened in February 1637.
3. Although it is a famous bubble, experts on this period do not believe the crash has a significantly adverse impact on the Dutch economy at the time.
4. At the height of the mania phase, the price of a single tulip bulb reached the equivalent of 10 times the annual wage of a skilled worker.
5. The tulip bubble gained further attention with the publication by ,Charles Mackay in 1814 of Extrodinary Popular Delusions and the Madness of Crowds.
This book went on to become an international bestseller and is still in print today.
6. Tulips started becoming widely cultivated in the Netherlands in 1593 and were considered a status symbol among the elite.
7. Flowers take up to 12 years to form from seed but once a bulb is formed, flowering takes place every year. Bulbs can then be transported during the winter months, making them a moveable commodity, easily traded.
8. Short selling was banned in 1610, 1621, 1630 and 1636.
9. In 1636, gin, herrings, cheese and tulip bulbs were the 4 biggest exports from the Netherlands.
10. It has been suggested that the trigger for the collapse in prices was an outbreak of bubonic plague in Haarlem.
Although it happened nearly 400 years ago, the pattern of the tulip bubble has been repeated many times since. Humans haven't changed and neither has the psychology of stock market bubbles.