Tulip Mania – A Reminder

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According to Wikipedia, tulip mania was a period during the Dutch Golden Age when contract prices for some bulbs of the recently introduced and fashionable tulips reached extraordinarily high levels, and then dramatically collapsed in February 1637.

In Europe, formal futures markets appeared in the Dutch Republic during the 17th century.  One of the most notable centered on the tulip market.  At the peak of the tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman.

Research into the event is difficult, because much of the limited economic data from the period came from potentially biased and/or speculative sources.  What is probably correct is, that by 1936, tulip bulbs were the fourth leading export product from the Netherlands, after gin, herrings, and cheese.  It is believed that the price of tulips skyrocketed because speculation in tulip futures was among people who never saw the bulbs.

Today, investors should be wary of possibly unexplained dramatic increases in trading volumes and prices.  Bubbles have proven difficult to identify until after the fact and can last much longer than expected before ultimately collapsing.  This suggests that a cautious approach is advisable.  Some apparent valuation anomalies may be a bubble or may be under appreciation of the future potential.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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