We are all familiar with investment bubbles, given that we’ve seen how sharp price increases in real estates in the early-to-mid 2000s were followed by a big drop in prices. Some folks have really been hit hard, as their homes have declined in value to a point where they’ve lost quite a bit of money. People that bought near the peak, and borrowed money to do so, discovered that the real estate bubble threat was in fact real.
Have we learned lessons from this experience? Or, will history repeat itself at some point in the future – even soon?
My prediction, based on history, is that there will be investment bubbles that emerge once again in our future. Not just one here and there, but plenty of them. It’s the way things have been with people over the last several centuries – and perhaps prior to that too, for all we know. Let’s take a look at two historical investment bubbles of note:
Dutch Tulip Bubble, 1600’s. As Holland grew in prosperity, certain Tulips began to increase in popularity. From there, the bulbs became hot commodities in a very short period of time. While the supply of bulbs didn’t increase, the number of people interested in purchasing them did. Soon, these people ran up the price of the bulbs to extraordinary amounts. By some accounts, people were paying multiple times their annual salaries, just for a tulip bulb. Eventually, the lunacy gave way to a crash in prices, and many people were left in ruins – with tulip bulbs to show for it.
South Seas Company Bubble, 1700’s. As England was in debt, it worked a deal with the South Sea Company to service its debt in exchange for “rights” to trade in places such as Asia, Africa, and South America. Stock was issued, and investors were caught up in the euphoria over this monopoly that had incredible potential (albeit in some business that was quite unsavory). The stock price reached dizzying heights, before doubts crept in and the decline started. It was held up for a while by legislation (“Bubble Act”), but prices eventually dropped like a rock. Big money was lost by many, except perhaps those who sold high and took off with their money.
Clearly, investment bubbles have been occurring for many years.
In the late 20th and early 21st centuries, we have seen bubbles that are more ingrained in our minds:
Dot Com Bubble, late 1990’s/early 2000s. This was quite a goldmine for those who sold at the right time, but a wealth destroyer for those who purchased at the wrong time. Companies with poor earnings (if any) had their stock prices pumped up based on future potential. Ultimately, the mania went out of control, and prices dropped. Here’s how the NASDAQ performed during the bubble, with the following closing prices during these months (Source: Yahoo! Finance)
- February 1999 – $2,288
- February 2000 – $4,697
- February 2001 – $2,152
- February 2002 – $1,731
Housing Bubble, early 2000’s to Present. This is so recent (and the effects continue today) that we know what the effects have been on people. Home prices in some areas have dropped by well over 50% since their peak. In many cases, homes just aren’t selling, and people are deep underwater on their mortgages. It’s a boon for first-time homebuyers or those just not currently owning but looking to buy. For the rest – particularly those who bought at the peak – it’s been less than desirable. For some of this group, it’s been devastating.
All of this historical information leads me to think of one more bubble:
The Baseball Card Bubble, 1980s. This probably eluded most people back in the day, and these days I wouldn’t be surprised if most people don’t know about this micro-market bubble. I do, since I was a baseball card collector as a kid – before moving on to the teenage years, when I soon dropped collecting all together for more exciting pursuits
As a huge sports fan, I started collecting cards and really enjoyed the older cards since I liked the game’s history. Then, the current cards started to skyrocket in popularity. Back in 1983-1987, it was crazy. I recall that packs of cards were cheap, less than 50 cents each. However, if you got the right card, you could make nice chunk of change. For example, when Mark McGwire was a rookie in the 1980s, his card was worth as much as $50. Can you imagine? Now, you probably could get them for $1 without much trouble.
Personally, I “invested” in a large amount of Barry Bonds cards back in 1987 when he was a young player breaking in. Who would have known he would eventually be the home run “champion” around 2 decades later? I outlined this story in my post “The One That Got Away”. Not much was invested, but nothing was made, despite the player’s amazing statistics. The baseball card bubble had already burst, and prices had plummeted.
Lesson Learned: Investment bubbles do happen, and we have to watch carefully for signs of them
My questions for you:
- As we look forward, do you think we might be looking at “The Gold Bubble of 2011 or 2012?” Prices are staggeringly high compared to a decade ago.
- Are there any other investments that you think may stand to lose significant value in the coming years?
photo credit: bortescristian