Read the 6 six most outrageous bubbles in history and see their common points so you can avoid the next big bubble (which is definitely on the way and will happen again)
Unrealistic expectations, fraudulent schemes, and speculation have always been driving people’s investment decisions. They say wise people learn from other’s mistakes, normal people learn from their own mistakes and dumb people never learn, which of them will you turn out to be in your future investments?
Key takeaways
• Avoid investing in assets with no intrinsic value or unrealistic expectations.
• Diversify your portfolio and avoid excessive leverage or margin trading.
• Be prepared for unexpected events and do not panic sell.
• Keep a long-term perspective and invest according to your goals and risk tolerance.
1. The Tulip Mania (1637)
• The first recorded speculative bubble in history, where the prices of tulip bulbs in the Netherlands soared to astronomical levels, only to collapse suddenly and wipe out many investors.
• The mania peak was in February 1637, when some tulip contracts reached more than 10 times the annual income of a skilled worker.
• The causes of the bubble are still debated, but some factors include the novelty and rarity of the tulips, the influence of social status and fashion, the lack of a formal market and regulation, and the outbreak of a plague that increased the demand for luxury goods.
• The crash of the tulip market had a severe impact on the Dutch economy and society, leading to lawsuits, defaults, bankruptcies, and social unrest.
2. The South Sea Bubble (1720)
• A massive stock market bubble in Britain, where the shares of the South Sea Company, which had a monopoly on trade with South America, rose dramatically based on unrealistic expectations and fraudulent schemes.
• The bubble began in 1719, when the company proposed to take over the national debt of Britain in exchange for various privileges and concessions, which sparked a frenzy of speculation and investment.
• The bubble burst in 1720, when the company failed to deliver on its promises and the demand for its shares collapsed, dragging down other stocks and the entire economy with it.
• The crash of the South Sea Bubble led to a parliamentary inquiry, public outrage, and the imprisonment and disgrace of many prominent figures involved in the scandal, including politicians, nobles, and bankers.
3. The Wall Street Crash of 1929
• The most devastating stock market crash in U.S. history, which marked the beginning of the Great Depression, a decade of economic hardship and social turmoil.
• The crash occurred over several days in late October 1929, when the Dow Jones Industrial Average plunged by almost 25%, wiping out billions of dollars of wealth and investor confidence.
• The causes of the crash are complex and multifaceted, but some factors include the overvaluation of stocks, the excessive use of margin trading, the lack of regulation and oversight, the unequal distribution of income and wealth, and the global trade imbalances and protectionism.
• The consequences of the crash were far-reaching and long-lasting, affecting not only the U.S. but also the rest of the world, triggering a wave of bank failures, business closures, unemployment, poverty, social unrest, and political instability.
4. The Black Monday of 1987
• The largest one-day percentage decline in stock market history, where the Dow Jones Industrial Average dropped by 22.6%, equivalent to a loss of $500 billion in market value.
• The crash occurred on October 19, 1987, following a week of volatility and uncertainty in the global markets, fueled by rising interest rates, trade deficits, currency fluctuations, and geopolitical tensions.
• The causes of the crash are still debated, but some factors include the herd behavior and panic selling of investors, the negative feedback loop and contagion effect of the global markets, the lack of liquidity and coordination among the exchanges, and the role of computerized trading systems and program trading.
• The impact of the crash was relatively short-lived and less severe than the 1929 crash, as the markets recovered quickly and the economy avoided a recession, thanks to the intervention and cooperation of the central banks and the regulators, as well as the resilience and innovation of the financial system.
5. The Dot-com Bubble (2000)
• A massive speculative bubble in the technology sector, where the valuations of internet-based companies soared to unsustainable levels, driven by the hype and excitement of the new economy and the digital revolution.
• The bubble peaked in March 2000, when the NASDAQ Composite Index reached an all-time high of 5,048.62, more than double its value a year earlier.
• The bubble burst in April 2000, when a series of events, such as the interest rate hikes by the Federal Reserve, the earnings disappointments and accounting scandals of some dot-com companies, and the sell-off of technology stocks by institutional investors, triggered a sharp decline in the NASDAQ and the broader market.
• The collapse of the dot-com bubble erased trillions of dollars of market value and investor wealth, and led to the closure or bankruptcy of many dot-com companies, some of which had never made a profit or even revenue. The burst also contributed to the recession of 2001 and the slow recovery of the technology sector in the following years.
6. The 2007-2008 Financial Crisis (2008)
• A severe contraction of liquidity in global financial markets that originated in the United States as a result of the collapse of the U.S. housing market and the subprime mortgage crisis.
• The crisis reached its peak in September 2008, when several major financial institutions, such as Lehman Brothers, Bear Stearns, and AIG, failed or were bailed out by the government, and the stock markets plunged worldwide.
• The causes of the crisis were complex and multifaceted, but some factors include the low interest rates and lax regulation that encouraged excessive risk-taking and leverage, the securitization and proliferation of mortgage-backed securities and derivatives that spread the contagion across the financial system, and the lack of transparency and accountability of the rating agencies and the regulators.
• The consequences of the crisis were far-reaching and long-lasting, affecting not only the financial sector but also the real economy, triggering the Great Recession, the worst economic downturn since the Great Depression, and leading to massive job losses, foreclosures, debt defaults, and fiscal deficits.
