Lessons to learn from 400 years of speculative bubbles

Posted by TEBI on May 31, 2024

Lessons to learn from 400 years of speculative bubbles





A little-known fact about my friend and colleague Mark Hebner, the founder of Index Fund Advisors, is that he’s an avid collector of antique books about finance and investing. Visitors to our headquarters in Irvine are often shown the IFA library, which contains first editions of some of the most important books written on these subjects since the 1700s.

Of all the books in the library, perhaps my favourite is an original copy of The Great Mirror of Folly, which was published anonymously in Amsterdam in 1720. The book is written in Dutch (its real title is Het Groote Tafereel der Dwaasheid) and it offers a unique window into two financial bubbles that burst that year — the South Sea Bubble in England and the Mississippi Bubble in France. It also refers to another famous bubble, Tulip Mania, which occurred in the Netherlands in the 1630s.

The book is a collection of texts, satirical engravings and poems that critique and mock the folly of investors who were caught up in the speculative frenzy of the time.


Behaviours haven’t changed

What makes The Great Mirror of Folly so remarkable, however, is that the behaviours it describes are no different to those displayed by traders and speculators buying and selling, say, meme stocks or cryptocurrencies today. One man, his arms wide open in disbelief, says: “Oh! Craziness robbed many foolish traders of wealth and health, leaving them with empty hands and wallets.”

“My stock certificates are worthless,” declares another. “They cannot bear the light of day. They quickly fan the flames for only a short time, just like all the bubble stocks.”

What comes over very strongly in the book is how the traders who lost money thought they had the skill and knowledge required to prosper from their speculation. “I thought I could acquire splendor from my trading skills, says one. “But oh no! In the end, I am broke.”

Another holds a book called The Dubious Trading Book and laments: “I understand the stock market as little as I understand the orbit of the seven large planets.”

There are, inevitably, a few winners depicted as well. “Fortune brings me out of slavery,” says a man by the name of Jack who clearly managed to sell his stocks before they crashed. “My star trader changed me from servant to gentleman, even though many gentlemen became beggars.” 


Many more bubbles followed

In the three centuries since The Great Mirror of Folly was published we’ve seen many more examples of speculative bubbles. For example, Britain experienced Canal Mania in the 1790s, with investors pouring money into canal building. Then came a bubble in railway stocks in Britain in the 1840s, and, to a lesser extent, in the U.S. in the 1870s. There were major stock market crashes worldwide in 1929 and 1987, and two more bubbles burst either side of the Millennium — in Asian stocks in 1997, and in dotcom stocks between 2000 and 2002.

All of these episodes teach us valuable lessons.



This article is based on the book Index Funds: The 12-Step Program for Active Investors. The issues it raises are addressed in Step 9:




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