INVESTING (EVERYONE). Recorded December 18, 2022. Released January 6, 2023.
For episode 9 of At The Rotterdam we talk a bit about financial bubbles, centering on one of the worst boom/bust tropes in financial history, the Dutch tulipmania of 1686-7.
The tulip bubble is a terrible poster child for bubbles. For one thing, it didn’t really happen, no matter what Charles Mackay wrote in his famous 1841 book.
To the extent that prices rose and fell, the event was too small to impact most of the citizenry, or other markets.
The tulip bubble had no long-term technological benefits, unlike bubbles in internet stocks, railways, cars and bicycles, to name a few.
Tulipmania had no regulatory response, unlike the South Sea Bubble of 1720 or the subprime boom and bust.
In any event, it is almost impossible to tell when a bubble has started or even finished. The 1998-9 NASDAQ looked like a bubble in 2001. But a small blip in a long bull market today.
So not only are bubbles not as evil as many a morality tale contends, they can be forces for good. And trying to avoid them risks missing capturing the risk premium if the market doesn’t crash. Not all booms go bust.