Too Good To Be True

When flipping or scrolling through a brochure of a travel agency, it’s a pretty safe bet, that the illustrations for a journey to Holland contains a picture of a tulip farm. And for the nights, you might choose between the ‘Golden Tulip’, the ‘Royal Tulip’ or the ‘Tulip Inn’.

The national flower of the dutch did not grow naturally in Holland, the first tulip bulbs were imported about 500 years ago from the orient, from Persia and Turkey.

It’s hard to believe – but it’s true: what today is enchanting many visitors in Holland, was once the subject of a speculation frenzy and led to the first market crash in history, leaving thousands in dire poverty.

As always, it started unnoticed. The exotic flower from far away was first a prerogative of the upper class at the end of the 16th and the beginning of the 17th century. Then, around 1625, more and more ordinary people were buying tulip bulbs on the spot markets around the country to cultivate them in their gardens. The colorful flowers then caught even more eyes and were attracting new buyers. The price of tulip bulbs started to rise constantly during the next years, but as long as the buyers were using the bulbs to beautify their gardens, no problem.

This changed dramatically around 1635, when the rising prices caught the attention of speculators, who didn’t bought the bulbs for the private garden, but to resell for a higher price.

And the speculation paid off, within a few weeks, the price of a tulip bulb from the sort ‘switserts’ rose from 125 to 1500 guilders, and in five days, a speculator made more money than he earned while honestly working for the last five years. Stories like that were spread around quickly, only to attract more and more ordinary people to participate in the speculation.

To buy the tulip bulbs, many were selling their houses, a farmer offered his home plus ‘8 fat pigs’ for three bulbs, convinced not to work a single more day on his farm after selling the bulbs with a huge profit. ‘Tulipomania’ was in full swing.

It was too good to be true and the inevitable started in February 1637 in Haarlem and at an auction in Alkmaar. There were no buyers anymore for the demanded prices. Tulipomania was over. When the prices came crashing down, many of the last buyers at the highest prices remained in dire poverty for the rest of their life.

Historical lesson number two: when a price is rising due to an improvement of a product – I guess the Iphone fits into that category – then you can participate and buy the share (here Apple) without too much risk. If a price goes up only in anticipation of even further rising prices, as it happened with the tulip-bulbs in Holland – or closer to home, with the real estate market in Bucharest 10 years ago, then hands off. The crash might occur just after you bought for a high price.

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Speaking of real estate and the way to finance a house. What buyers need to know about the forex-markets when choosing a credit in a foreign currency, is coming up in the next chapter: http://www.theleader.ro/forex-winners-loosers/

 

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