What was the Dutch Tulip Mania and what lessons does it hold for the modern economy?

Oct 11, 2019 | 1 month ago | Read Time: 3 minutes | By iKnowledge Team

Tulips are actually not indigenous to the Netherlands but came to that country from Turkey. This happened in the 16th century. The flowers were, then as now, very attractive, and there was a great deal of demand for them. People wanted them and were willing to pay a high price for the bulbs. Genuine buyers wanted to grow them either in their gardens or commercially.

All that changed when the tulip bulbs became infected with a virus called mosaic that instead of destroying the flower caused the petals to acquire a ‘flame-like’ colour. The colour came in exotic patterns and no two of them were alike. Overnight a kind of frenzy was created, as everyone wanted to possess the unique, brightly patterned tulips.

A feverish speculative activity began to develop in tulip bulbs. In the space of a month due to the demand, the price of the bulbs rose nearly twenty-fold. People pledged, sold their land, their assets, and borrowed recklessly to raise money. The supply of bulbs could not keep up with the demand and prices skyrocketed. Those who were sensible and realised that a bubble was building up, cashed in their profits but the clear majority were caught up in the exuberance of the tulip mania. In all the frenzy, nobody stopped to think that they were staking everything on a bit of greenery, which had no intrinsic value.

Eventually the bubble burst, dealers refused to honour contracts, prices crashed, and people were left holding a lot of beautiful flowers that nobody wanted. Though the Dutch government had attempted to intervene, it was too late. The Dutch economy did not collapse but those who speculated and were involved in the buying and trading were certainly impoverished overnight.

The Lessons to be Learnt from the Tulip Mania

There are some valuable lessons to be learnt from the Dutch Tulip Mania, which we have related above.

Lesson 1

Markets often exhibit irrational exuberance and we must guard against that. You may have often seen people rushing to buy homes in a certain locality, or by a builder attracted by the hype created around it, about what a wonderful opportunity it is. Be advised, don’t! Do not be caught up in the exuberance, however good it may look and sound. Never be a part of the herd mentality.

Lesson 2

Look at the fundamentals. Assess the worth of the product or asset that you want to buy. There must be an intrinsic value to something and that value flows from its usefulness, its contribution in creating future value and its performance. If all these three elements are missing, then there is something wrong with it. Look at the long-term investment opportunity.

Lesson 3

Be sensible and not emotional. This is probably the hardest part. When all around you everyone is talking about the latest craze, news headlines and news anchors are screaming about it, it is difficult to be sensible. You also want to speculate and accumulate. If others can do it, why not you? If that is the way you are thinking then you should probably go on a long journey to put you out of the reach of temptation, because that is not a good investment idea. You should never act when you are in the grip of a strong emotion. Short term investments that are risky are for speculators.

 Lesson 4

Never be part of the rush: In the 1990s, several companies called Collective Investment Schemes started raising money from the public with the lure that they would be owning plots of land by paying for them in instalments. The lure was not the land, but teaks, apples orchards, chikoo trees and so on, which were supposed to yield cash flows in the future to the investors. After collecting money, however most of these companies just vanished, leaving investors high and dry. This came to be known as the Plantation Scheme scam. The lesson here is don’t get tempted to join in the rush. Just because other people are investing, that is no reason for you to do so blindly. It pays to wait and watch!

Behavioral psychology, especially that of investors, is a subject of intensive study. If markets are irrational, it all has to do with the people who are driving it. Every market thrives on demand and languishes due to lack of it. Our own perceptions of the value of an asset are what keep the money flowing into and out of the markets. To know about Aegon Life’s life insurance products like term insurance and other products, visit our home page.

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