Bubbles In History

There is all sorts of talk about why the “Tech Bubble” was created then burst so suddenly. It’s really no secret, especially when looking at it in hindsight.

Bubbles happen over and over in history because the chance to make a buck is generally too appealling for the public to resist.

Bubbles have happened all through history, in every country and in various sectors of these economies. Let’s take a quick stroll through a few major bubbles over the centuries:

Tulip-Bulb Bubble of 1634

  • A non-lethal strain of virus caused some tulips to devlop stripes.
  • Enthralled with these new flowers, tulips were in high demand.
  • As more and more people watched all their friends getting rich by selling tuplip bulbs, they too saw an opportunity to get rich quick.
  • People from every walk of life starting selling the bulbs, even selling their homes to buy them.
  • With such nice high prices, everyone started selling their bulbs to extract profit. Supply now far exceeded demand and the prices fell dramatically.
  • Many small investors were highly leveraged to buy tulip bulbs, and many loans were defaulted on.
  • The small investors ended up being hurt the most.

The South Sea Bubble:

  • In 1711 The South Sea Company was formed in England.
  • Public saw enormous potential in the South Sea Company and the soaring stock price showed their sentiment.
  • All sorts of new companies went public after seeing The South Sea Company’s success on the market. All these stocks enjoyed immediate stock inflation as the public poured in money.
  • The directors of the The South Seas Company saw their stock rise from 55 to 1,000 and knew it had no relationship whatsoever to the company earnings.
  • They sold all their stock at its highest price.
  • Directors then made the announcement that the stock was not being based upon actual earnings, but public speculation.
  • The stock plummeted as people began bailing out of the stock
  • The small investors ended up being hurt the most.

Florida Real Estate Craze of the 1920′s:

  • Land bought in Miami for around $800,000 in 1923 could be subdivided and sold in 1924 for twice the price.
  • The next year, that same land could be sold for $4,000,000. With real estate red hot, the public saw an opportunity and acted.
  • One third of the Miami population had become real estate agents by this time.
  • The bubble then collapsed as there was a lack of buyers and huge supply of sellers.
  • The small investors ended up being hurt the most.

Needless to remark on, the severe stock crash of 1929 was also just a giant bubble that burst.

What I’ve noticed is the remarkably similar situation we are currently experiencing with real estate. The popularity of books like “Rich Dad, Poor Dad” which promise riches from buying old properties and selling or renting them out has encouraged everyone and their dog to become involved in real estate and become an agent.

The small investors will invariably get hurt in the end.

You cannot predict the madness of the masses, so a better lesson to take out of this is how to profit from it: Get on board early and when the masses of people start entering the sector, get ready to bail.

Obviously this is easier said than done.

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    Blog posted on: April 18, 2005

    8 comments on “Bubbles In History

    1. Cap

      the debate over if there is a real estate bubble or not.. is obviously a heated one, especially if you take a look at the thread that goes on over at fatwallet’s forum.

      after the information overload via the net and own personal reference, I do have to agree that certain locations do have the symptoms of a nice big fat bubble. the prices some people paying for some properties are just WAY too much in terms of their actual value.

      you brought up a very good point.

      if I remember right, in rich dad’s series, he also mentions that a wise/successful investor will also profit from a crash/burst. I suppose its taking advantage of some people, but if there is a housing bubble and when it does burst; the people that got in too late and bail out too late will be where the cheap bargins come from…

      I feel like its a bit overblown here in Southern California. One person to the next is speculating on housing prices, and I see people running around trying to gather up investor to buy properties all the time – with little experience or knowledge in history or the present market condition.

      its a bit scary.

      Reply
    2. savvy saver

      I can see evidence of a bubble here. Young people are buying housing assuming the value will climb, and they aren’t seeking value or something they can afford and live in for the long-term. I have friends and friends of friends buying rental property that doesn’t create positive cash flow because they are sure they will get rich on appreciation. Property values are high and rents are depressed. It likely won’t be a true bubble because of the difficulty in liquidating real estate, but it’s not a good situation.

      Reply
    3. Anonymous

      One of the people who made a lot of money on South Sea Company stock was Isaac Newton. Unfortunately he invested his earnings some investments that made him lose it all. A famous quote of his alluded that he can predict the motion of the cosmos, but not the craziness of the people.

      Reply
    4. Anonymous

      Actually, Newton made money on the South sea, but when the hype came, he put it all (and more) back in the same company, thereby losing much more. It is said that he’d never allow the South Sea to ever be mentioned in his presence thereafter.

      Reply
    5. Anonymous

      bottom line what the simpletons are learning, or will learn, the severe way. real estate is not drug dealing. fast money is a falsity unless illegal. your house is NOT worth more than it was five years ago. thats the end of the story. anyone who fell for this ‘smoke and mirrors’ BS set up to dupe the idiotic public deserves to feel the burn of its withdrawl. p.t. barnum was right – a fool and his money ARE soon parted. history shows us what happens in times like this – this time will mark the most severe of them all. housing is over – like in holland after the tulip bubble crash real estate never, i repeat NEVER increased again. thats not propoganda, that is REALITY.

      didn’t buffett say ‘when the masses get greedy i get scared’?

      Reply
    6. Keith

      I would just mention that now in ’08 you can look back and see how right you were. The big investers get a goverment deal and everyone else gets 300 bucks.

      Reply

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