There is all sorts of talk about why the “Tech Bubble” was created then burst so suddenly. It’s really no secret, especially when looking at it in hindsight.
Bubbles happen over and over in history because the chance to make a buck is generally too appealling for the public to resist.
Bubbles have happened all through history, in every country and in various sectors of these economies. Let’s take a quick stroll through a few major bubbles over the centuries:
Tulip-Bulb Bubble of 1634
- A non-lethal strain of virus caused some tulips to devlop stripes.
- Enthralled with these new flowers, tulips were in high demand.
- As more and more people watched all their friends getting rich by selling tuplip bulbs, they too saw an opportunity to get rich quick.
- People from every walk of life starting selling the bulbs, even selling their homes to buy them.
- With such nice high prices, everyone started selling their bulbs to extract profit. Supply now far exceeded demand and the prices fell dramatically.
- Many small investors were highly leveraged to buy tulip bulbs, and many loans were defaulted on.
- The small investors ended up being hurt the most.
The South Sea Bubble:
- In 1711 The South Sea Company was formed in England.
- Public saw enormous potential in the South Sea Company and the soaring stock price showed their sentiment.
- All sorts of new companies went public after seeing The South Sea Company’s success on the market. All these stocks enjoyed immediate stock inflation as the public poured in money.
- The directors of the The South Seas Company saw their stock rise from 55 to 1,000 and knew it had no relationship whatsoever to the company earnings.
- They sold all their stock at its highest price.
- Directors then made the announcement that the stock was not being based upon actual earnings, but public speculation.
- The stock plummeted as people began bailing out of the stock
- The small investors ended up being hurt the most.
Florida Real Estate Craze of the 1920’s:
- Land bought in Miami for around $800,000 in 1923 could be subdivided and sold in 1924 for twice the price.
- The next year, that same land could be sold for $4,000,000. With real estate red hot, the public saw an opportunity and acted.
- One third of the Miami population had become real estate agents by this time.
- The bubble then collapsed as there was a lack of buyers and huge supply of sellers.
- The small investors ended up being hurt the most.
Needless to remark on, the severe stock crash of 1929 was also just a giant bubble that burst.
What I’ve noticed is the remarkably similar situation we are currently experiencing with real estate. The popularity of books like “Rich Dad, Poor Dad” which promise riches from buying old properties and selling or renting them out has encouraged everyone and their dog to become involved in real estate and become an agent.
The small investors will invariably get hurt in the end.
You cannot predict the madness of the masses, so a better lesson to take out of this is how to profit from it: Get on board early and when the masses of people start entering the sector, get ready to bail.
Obviously this is easier said than done.