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Monday, 17 December 2012

Relating Past with Present/Future.

History often repeats itself . Came upon a chapter in  " Identifying the risk" in relate with the famous market illogic known as "tulip mania" occurred in Holland hundreds of years ago .

So here's a summary of the event .



Speculators invested  their utmost fortune in single tulip bulbs which turned the market crazy . Prices ran up and common people became rich . Then the whole thing crashed and all of those fortunes were lost. This happened in the 1630s .

The seed of tulip may takes 5-10 yrs to produce a flower , and another 3-5 yrs to evovle into a flowering bulb.Rarity is further defined by the color markings in the tulip. Ironnically , the color results that reduces number of offsets in the bulb made the them even more rare.

In 1635 , an important change occurred in the tulip market . Instead of selling flowering bulbs once produced ,Trading began even when the tulips were still in their ground . Alot of this trading took place by promissory note rather than an exchange of real cash .

The market soon evolve into a type of  tulip futures situation. Speculators saw great potential because of time maturity , weight and quantity created several hundred percent growth in value in this futures market . By 1636 , the market grew considerably  by a following year of depressed prices which allow many people that could afford to get into the tulip speculation business .

The market rose to irrational and exaggerated levels as traders started selling tulips that recently been planted and even made sales for tulips that are not even planted . This was a dubious move called windhandel(wind trade ) .

The speculative bubble had reached its peak and prices would not rise any further by beginning of 1637. The entire bubble burst rapidly and suddenly , many of the futures contract holders discovered that their speculative holdings were worthless overnight. Thousands of investors , traders and speculators lost everything .

Speculators of that period mortgaged their properties to get into the game and committed themselves to unimaginable debt , believing they were going to get rich .

Lessons  taught 

- Irrational speculation never anticipates the end
-Few speculators set prices for themselves to take profits and get out .
-Logic flew out when profits seems too easy to make.
-Never follow the crowd , specially when emotions run high.
-Be willing to lose a few golden opportunities for exchange of long-term certainty.
-Set specific profit and loss limits and follow your own rules.

Reflections

This historical event held similarities with the Dot.com bubble bursts that happened in y2k. Perhaps for the Properties " "bubble bursts " as well . It serves as an reminder and the above points in lesson taught  for myself .  

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