It’s tulip season around here; The New York Times had a wonderful story today on Rembrandt and dutch tulips. They’re pretty, but I love them for more than their looks…
A very special person to me loves tulips. I do too, and I also love them as a reminder of bubbles- financial ones. Tulips are the first great bubble in modern recorded history, as detailed in the wonderful book called Extraordinary Popular Delusions and the Madness of Crowds. It’s an early study of crowd psychology by Scottish journalist Charles Mackay, first published in 1841. It’s still in print, and cited by financial wizards from Bernard Baruch to Michael Lewis.
Tulips had quite a run in in the 17th century.
As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs with the virus, and prices rose steadily. By 1634, in part as a result of demand from the French, speculators began to enter the market. The contract price of rare bulbs continued to rise throughout 1636, but by November, the price of common, “unbroken” bulbs also began to increase, so that soon any tulip bulb could fetch hundreds of guilders. That year the Dutch created a type of formal futures market where contracts to buy bulbs at the end of the season were bought and sold. Traders met in “colleges” at taverns and buyers were required to pay a 2.5% “wine money” fee, up to a maximum of three guilders per trade. Neither party paid an initial margin, nor a mark-to-market margin, and all contracts were with the individual counter-parties rather than with the Exchange. The Dutch described tulip contract trading as windhandel (literally “wind trade”), because no bulbs were actually changing hands. The entire business was accomplished on the margins of Dutch economic life, not in the Exchange itself. By 1636, the tulip bulb became the fourth leading export product of the Netherlands, after gin, herrings and cheese. The price of tulips skyrocketed because of speculation in tulip futures among people who never saw the bulbs. Many men made and lost fortunes overnight.
To me, it’s really a study in momentum and how early adopters strive to bring along the crowd they need. Modern examples would include 1987 and Wall Street’s Epic crash, 1996 and the beginning of dot.com, 2008 and Sub-Prime Debt on the bad side… the Mobile Social Complex on the good side. Platforms got in there somewhere– like Uber, Lyft, and AirBnB. San Francisco probably has twenty more I missed here.
As I look at deals, and choose how to allocate my resources, I think about what bubbles we may be in, and how early (or late) we might be in that momentum. Looking at what’s in the mix lately, I might mention Blockchain, SaaS, DTC, Bitcoin, AI, Sustainable Energy. when I look at these bubbles, how they formed nd built momentum, I often ask myself …can I tell my grandkids about this time in my career… and really say “but I didn’t cultivate any???”.
Anyways, now you know why tulips are among my favorite flowers.
PS; Why is the DJIA and NASDAQ at all time highs, BTW?
PPS; Read the Black Tulip by Dumas for a great story on all this.