Markets often display some of mankind’s most irrational behaviors.
While most of us on this list are well aware of the Dot-com bubble and the even more devastating Great Financial Crisis —both of which had their fair share of irrational market behavior — economic bubbles bursting are not particular to the 20th and 21st centuries.
Let’s go take a trip down memory lane all the way to 17th century Holland.
Tulips entered the European market in the 16th century through the spice trading routes. These newly formed trading routes brought an unprecedented number of goods that were never seen on the European continent.
Tulips’ exotic nature made them attractive items for Europe’s well-to-do. In fact, having tulips in one’s garden was viewed as a sign of refined taste.
Holland was unique among European nations for its relatively liberal government, which allowed it to develop a strong merchant class. This merchant class helped make Holland the most economically-developed country in Europe at the time.
With their newfound wealth, Holland’s merchant classes emulated other European elites and began to buy copious amounts of tulips. By the end of the 16th century, Tulips became a status item for Dutch elites who made sure to acquire the flower as a staple of their gardens.
Like several kinds of flowers, tulips were known for their fragility and would die quickly without being properly cultivated. In response to this dilemma, a new sector of professional cultivators stepped up to plate to address this problem. They sharpened their techniques to grow the flowers locally, which created a booming sector that is still active in contemporary times.
By the mid-17th century the acquisition of tulips reached a mania phase in Holland. With speculators getting into the tulip market, tulip bulb values reached spectacular heights.
According to certain historical accounts, the rarest tulip bulbs fetched a value that was six times as much as the average person’s annual salary. The so-called “tulipmania” reached its zenith from 1634 to 1637, when even the lower rungs of Dutch society started to get in on the tulip trade.
Holland was well known in the 17th century for having the first stock market in Amsterdam. Stock traders were very much getting into the tulip mania and trying to make a quick buck.
The price of tulips shot up and there was a general belief that the price would only continue going up. Like any other bubbles, people started using questionable methods to acquire tulips. Many Dutch citizens began buying tulips with leverage.
Many people bought these bulbs on credit in hopes of repaying their loans when they sold their bulbs for a profit. However, once prices began to drop, tulip holders were compelled to liquidate. In effect, tulip bulbs were sold at any price and declared bankruptcy once the party ended.
However, economic reality finally struck Holland in the face. By 1637’s close, prices plummeted and never went back to their bubble peak. Once the dust settled, tulip mania became another economic bubble for economic historians to analyze.
Here’s the thing, a lot of economics is psychological. When people behave like frenzied herds, all sorts of funky stuff will occur.
Indeed, this is how things work in the volatile cyclical markets in the U.S. These markets — Los Angeles, New York, and San Francisco — are known for their cultural appeal. Naturally, this draws a lot of investors and people who take part in the action because of how trendy these markets are.
This is a red flag, as most seasoned income property investors know.
When you add in how most linear markets are generally situated in excessively pro-tenant states, these places become a no-go zone for the income property investor in search of reliable cash flows.
In my time doing business, I’ve learned that doing the opposite of what the masses are doing is often the best course of action. It pays to be a contrarian.
With 2022 in front of us, you should pause and reflect on how the past year has panned out for you. Perhaps you made progress, but still think you could do better.
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