The first financial bubble in history occurred, incredibly, over tulip bulbs (1634 – 1637). Holland in the 17th century – The Dutch Golden Age – was the leading grower of tulips in Europe; the inherent beauty of these vivid and vibrant and colorful flowers attracted kings, nobility, and czars, as well as commoners to buy their bulbs. The popularity of tulip bulbs caused a speculative frenzy in Holland in what has been called by historians “Tulipmania.” The majority of Dutch of all classes bought tulip bulbs – maids, servant, royalty – so that exchanges for buying and selling them and tulip futures, not the actual flowers, arose throughout the country. Many investors bought bulbs and contracts on credit, hoping to repay their debt in the future when they realized profits worthy of Midas. It was a cheap way to speculate for future riches.
Prices of tulip bulbs and tulip futures soared to the stratosphere. By 1635, 40 bulbs sold for 100,000 florins; a skilled laborer earned from 150-350 florins a year. One investor offered 12 acres of land for one or two Semper Augustus bulbs. The most expensive tulip transaction that has been documented is a sale of a few bulbs for 5,000 florins, the going rate for a magnificent house in 1637. It is difficult to translate the purchasing power of money from one historical period to another, but some historians assert that 5,000 florins is about $750,000 in today’s money. The most expensive bulbs and their futures were the result of a virus that caused the flower’s petals to develop spectacular colorful, variegated patterns (see picture below). Tulips themselves even began to be used as a form of money in their own right; in 1633, actual properties were sold for handfuls of bulbs.
Purchasers of bulbs at high prices resold them for even higher prices for ever-increasing profits. As in most speculative bubbles, everyone thought that the craze would last forever. By 1637, however, new buyers of bulbs shrunk, demand collapsed: the bubble burst. Bulbs and contracts for them were now worth a fraction of their cost. The word “bubble” was coined in 1634 over Tulipmania.
Great losses of capital were incurred, but the longer lasting effects of Tulipmania was that it created skepticism in the public over the dangers of investing. Dreams of riches were dashed by the laws of supply and demand.
Caveat Emptor! Do not allow “irrational exuberance” or Tulipmania to replace real value. Entering 2022, we do not think the current investing environment is in a maniac state of price exuberating, and the proliferation of media headlines suggesting so are false. However, we are ever more conscious of constructing investment strategies which emphasize the true value aspects of a company. We are focused planting the right seeds rather than a multitude of seeds.