On Tulips and Tech Stocks

Greetings from Split, Croatia. 

I’d love to tell you that I’m here researching some amazing new investment opportunity. 

But that would be an absurd lie. 

I’m here because it’s the end of July, it’s hot, and swimming in the Adriatic sounded amazing. 

I do still have an investment message for you today, but first, let’s talk about art. 

Before arriving in Croatia for a week of blissful nothingness, we spent time in Amsterdam, Rome, and Florence. I made my long suffering wife and children go to the Rijksmuseum in Amsterdam to view a couple Rembrandts with me. Kudos to them for nodding patiently while I droned on all afternoon about the artist and his work. 

Ice cream helped their suffering. 

The Birthplace of Financial Bubbles…?

Amsterdam was, of course, the site of the modern world’s first great financial bubble… one every bit as asinine as meme stocks. (Ok, maybe not that asinine, but really close.)

The 1600s were a golden age for the Netherlands. Apart from producing some of the finest painters to have ever picked up a brush, it was a time of economic and political advancement. 

Newly independent from Spain, the Dutch Republic was one of the first to experiment with a republican government outside of Italy.  

And they became fantastically wealthy as traders.

On one fateful commercial voyage, tulip bulbs from the Ottoman Empire made it to Amsterdam. Thus started the first and arguably one of the strangest speculative mania of the modern era. Bored ape NFTs and the GameStop mania are the others.

Tulips were (are) pretty. They were unique (at the time). And importantly, they were expensive, which made them a status symbol and a luxury good.

What better way to show that you had really made it in 1600s Amsterdam than to have an ostentatious garden full of wildly expensive flowers from the East?

The more rare or unusual the color, the better. If they had stripes or multicolored petals, that was best of all!

The Magic

The magic of capitalism is its ability to satisfy any need, no matter how frivolous or absurd. And the freetrading Dutch were experts at delivering the goods. 

Soon, bulb speculation became wildly profitable and took on a life of its own. 

Futures contracts were introduced that were not materially different from the futures contracts traded today in Chicago on corn or crude oil. They allowed traders to speculate on the price of tulips without actually owning the bulbs or even seeing them. 

Bulbs would be bought and sold without ever being planted. 

To the extent that there were ever any “fundamentals,” they stopped mattering. 

Tulip flipping was the hottest game in town.

That went about as well as you’d expect. 

As the speculative fever continued to boil, prices became more detached from reality. 

The Semper Augustus, one of the rarest and most coveted tulips, reached 6,000 guilders for a single bulb at the peak of the market. 

To put this in perspective, that was enough to purchase a nice house in Amsterdam at the time, or the equivalent of a small estate with several acres of land. 

The Haarlem Auction

It all fell apart in early 1637. 

Panic set in when buyers failed to show up for an auction in Haarlem, triggering a massive crash. Awash in massive oversupply, the tulip bulb market collapsed, causing widespread financial ruin. 

The Dutch weren’t stupid or irrational (mostly). There may have been a few who truly believed the bulbs they were buying had actual value… but most traders were simply speculators. They were following the trend and looking to sell for a quick buck… just like meme stock traders today.

There’s nothing wrong with that, and I will NEVER tell you not to speculate. By all means, do it! It’s fun and might actually make you some money.

BUT, be smart about it. 

Keep your position sizes reasonable. 

Have risk management in place, such as stop losses. 

Know ahead of time when and how you plan to sell. 

Most importantly, don’t try to build a narrative around it or justify it. The minute you do that, you lose your objectivity. It’s no longer just a trade. It’s personal. And then you’ll talk yourself out of selling it and end up taking easily avoidable losses.

How to Keep a Cool Head

One of the easiest ways to keep emotionally detached when speculating or even trading responsibly, is to use a system. Heck, use several systems if that’s what floats your boat and keeps you in check. 

My favorite is the Seasonality Tool that fintech firm TradeSmith has developed. Every stock, ETF, indices, and market moves through seasons. Knowing when there is a bullish or bearish period ahead helps you position yourself accordingly. And, knowing when those periods end gives you a definite sell date that removes any emotion from the equation.

TradeSmith’s Seasonality Tool runs a staggering 50,000 tests a day to analyze every stock in the major indexes and zero in on the ones with the strongest seasonality trends…

If you’re not already familiar with TradeSmith, it helps people in 86 countries track $30 billion in assets. Its mission is to get world-class analytics in the hands of as many investors as possible to help level the playing field with Wall Street elites.

One of its most powerful – and popular – tools is the seasonality one. 

I wonder what the Dutch could have done with this tool during Tulip Mania. I can only imagine it might have saved at least a few fortunes.

To learn how this tool works… why it works… and how you can put it to work in your own wealth building tool kit, watch this special presentation. Be warned though, this video will only remain available until midnight on Wednesday (tomorrow).

Now, I have a warm ocean to swim in and a cold beer calling my name. 

I’ll leave you to it.

To life, liberty, and the pursuit of wealth.