FORGOTTEN HISTORY LESSONS

 
 

Famous American writer Mark Twain once said that history never repeats itself, but it rhymes. One needs to know the history before he/she sets out to plan their future. One history that everyone should know is about the financial bubbles that have been present since the 1600s. The first ever financial bubble recorded was of the tulip mania. The event took place during 1630-37. Once planted, it took 3 years for the tulip to completely grow. Suddenly, after 1630, the demand for tulips skyrocketed. Instead of demanding the tulip flower, people started demanding the tulip bulbs. The speculation drove the price of tulip bubbles to an extreme. At the market's peak, the rarest tulip bulb traded for 6X the annual salary of average person. Humans are irrational, and when something good is going on, we tend to believe that it is going to last forever. People during the tulip mania thought the same and took out loans to buy the tulip bulbs. When leverage is involved, the game becomes nasty. The sole reason why people were buying the tulips was because they were expensive and were used as a status symbol. The greed to show one's superiority by possessing material things can kill us. The same happened. The rapid decline was driven by the fact that people had bought the tulips on credit in anticipation of selling them for profit in the future, but that future never arrived, and those who had bought the flowers on credit, started defaulting on their loan repayments. This was a domino effect. One failed payment led to other failed payments, and so on. As stated earlier, history never repeats, but it does rhymes. Similar events were faced by humanity during 1930. 

After Herbert Hoover was elected president of the US, the markets went into a frenzy. The markets started to fly and reach new heights. This was the boom of the 1920s. People started buying stocks without doing any research because they thought that the only place for stocks to go was up. Everyone, from chauffeurs to cooks, deposited the extra liquid assets into banks and further with brokers. The word on the street was "stocks." Billions of dollars flooded the markets as the "markets always go up" theory came into action. If even the chauffeur starts talking about stocks, one needs to be cautious. In the summer of 1929, some 300 million stocks were being carried on margins (loans). 300 million was a big number back in the 1920s. For the same reason that tulip mania took place, the 1929 crash took place as well. People bought stocks using loans in anticipation of selling shares at higher prices in the future. To an extent, some were successful, but the future was dark. The Dow Jones (US Index) peaked at 381 during September 1929. From October, people started selling shares as they were getting margin calls. On October 24, the markets went into free fall. On the first day of real panic, investors rushed to salvage their losses and bought a record 12.9 million shares. The panic began again on October 28, which later became known as "Black Monday." Markets fell 12.8% in a single session. Markets fell by another 12% on the following Tuesday, which later became known as "black Tuesday." Remember, this was the 1930s. A 12% drop back then was devastating. For the next 17 years, markets were flat. There was a rise of only 1 point during those 17 years. This crash shares the same lessons as tulip mania. People anticipated that the markets wouldn't fall and, hence, bought stocks with loans. After some time, when markets weren't going up, people started panicking as they were getting margin calls. Banks had given loans without checking credit histories. Brokers also blindly gave shares on credit to unworthy people. The same greed that brought America down on October 29 also brought down the people of Holland during the tulip mania. Greed to own material wealth, thinking markets wouldn't fall, and taking loans were some of the reasons for the major fall.

The same thing happened during the 2008 crisis. The only difference was that more wealth was eroded during the 2008 crash. People also lost their lives after the crash. We need to reread the chapters of history and find the similarities that kill us. The things that took people in Holland down during the tulip mania are the same things that took Americans down during 1929 and during 2008. Until we have humans making financial decisions, we are going to find huge amounts of irrationality in the markets. We cannot predict where the markets are headed, but we have to consider the fact that, once in a while, markets face meltdowns and only the prepared stay alive. Make wise choices while making a financial plan. Also, invest with your own money. Never take loans for your investments. Always think, "How quickly can you recover your principle after investing in an instrument?" Always choose rationality over emotions in the markets. You cannot control the markets, but we can at least plan wisely so as to sustain the next crisis. In the end, markets always go up, so ignore the short-term happenings. Always remember what Mr. Warren Buffet says: "You don't find out who's been swimming naked until the tide goes out."

Happy Investing😁