Botanical-Flower-Tulip-ItalianSuddenly, the garden is ablaze with colour.  My wife's pathological obsession with planting bulbs becomes evident as the myriad of pots are exploding with tulips, everywhere you look.  As a bit of a non-gardener and observer, I must say that I am very impressed with both the scale of the display, and also the number of varieties in evidence. 

Coincidentally, I have been reading Charles Mackay's book, 'Extraordinary Popular Delusions and The Madness of Crowds', published originally in 1841.  It makes both fascinating and depressing reading.  For those inclined to read the book, it's worth noting that it can be downloaded, free, from Project Gutenberg in a variety of e-formats.

Mackay deals, in horrifying thoroughness with 'The South Sea Bubble', a British Government-inspired piece of speculation which kicked off in 1711, and which cost many people everything they had, but appeared to enrich a number of prominent politicians.  The South Sea Company was, throughout its notorious history, a device for managing government debt.

Most of us know about this piece of lurid history.  Perhaps a little less-known is an earlier, but completely bonkers phase of endemic speculation which has become known as Tulipomania.  In comparison, my wife's potting frenzy fades into the background, as the whole enthusiasm revolves around the trading and ownership of tulip bulbs, which first arrive in Britain in 1600, having been imported from Vienna.  As one reads Mackay's account, one is stunned by the rapidity with which the middle-classes became obsessed with items most of us would deem relatively modest commodities.  A trader in Harlem pays half of his fortune for a single bulb.  Cowley, the poet writes (rather naff) poetry about tulips.  Prices continue to rise exponentially during the first half of the 17th Century, so that a mere 40 bulbs could cost as much as 100,000 florins.  The variety 'Admiral Liefken' fetches 4,400 florins for a single bulb.  A sailor, who picks up a tulip bulb in a shop, in the mistaken belief that it is an onion, and eats it for lunch, is cast into prison for months until he can buy his way back out.  In 1636, markets for the trading of bulbs are established on the Amsterdam Stock Exchange, and 'tulip-jobbers' begin to drive a market of speculation.  As a result, money pours into Holland from all directions.  Trading activities become so complex, that a whole new legal code is drawn up, and Notaries and clerks are employed to supervise the trade.

The demise of the bubble is not long in coming.  The market in tulip bulbs was always unsustainable, and very quickly confidence in it wanes - and the fortunes, swiftly won, are equally swiftly lost.  The collapse is swiftly followed by credit (read 'compensation') schemes and tribunals, and thereafter into obscurity.

It's an interesting period of history, perhaps because of its novelty value - but also for the compelling parallels that emerge as one reads it with a sense of 21st Century hindsight.  Insofar as there is nothing 'new' about bubbles, one realises that human-beings are conspicuously immune to learning anything from history.  One would expect a kind of passing on of collective wisdom, but no, we simply repeat the same kinds of mistakes at intervals.  That much is depressing if we have some kind of notion about the advancement of civilisation.  There is also the dynamic of those 'tulip-traders', the whiz-kids who develop trading strategies of such complexity that (a) regulation is required and (b) the innocent and ignorant lose their shirts:  there are parallels there too, in relation to the activities of the banks and big trading houses on the world stockmarkets.  There will always be people who are simply too clever for their own good - and more usually (first of all) for the good of others.  As one looks around at banking activity, post-2008, one receives the compelling impression that absolutely nothing has been learned at all.

And there are lessons closer to home too:  people do stupid things, in the mistaken belief that they have some kind of magic inside track to wealth and success.  When the fifty year-old London trader approaches an IFA to assist him with an execution-only transfer out of a final salary scheme into a SIPP, so he can engage in Forex trading, there is only one possible rational answer:  'No'.  An execution-only disclaimer does not somehow immunise the IFA against the probable fallout from complete idiocy.

Related materials for ValidPath Members

Order-taker or Trusted Adviser?
Handling the Risky Stuff
Kevin Moss, 17/04/2014