02. The Madness of the Crowds

Dated Jun 1, 2019; last modified on Mon, 04 Oct 2021

The Tulip Bulb Craze

Virus causes colored stripes in tulip petals. The Dutch valued such bulbs. Prices rose (just when one thought they couldn’t go higher). Let the tulipmania begin.

Note: And that’s where FOMO comes in. You can’t argue with the results. You just want to dip your toes and get out. I watched Bitcoin keep climbing, until I got into the game with $50…

Tulip bulbs options. 20 for a bulb currently worth 100. If the price moved to 200, the option holder exercises his right: buys at 100 and simultaneously sells at 200, making a profit of 80.

Prices eventually got so high that some people decided they would be prudent and sell their bulbs. Soon others followed suit, and then others…

The South Sea Bubble

Long prosperous period led to fat savings and thin investment outlets. The South Sea Company rose as an investment vehicle. It was given a monopoly over all trade in the South Seas.

The South Sea Company was England’s answer to the French Missisipi Company (aimed to introduce paper currency; investors flocked). There’ll be peace with Spain. We’ll finance the national debt. Stocks payment plan: we’ll lend you £££ - 10% now and not another payment for a year.

The public bought up anything: importing jackasses from Spain; making saltwater fresh, building ships against pirates; encouraging the breeding of horses in England; trading in human hair; building hospitals for bastard children; extracting silver from lead; extracting sunlight from cucumbers; producing a wheel of perpetual motion.

1720 was a crazy year. A company whose description was “a company for carrying out an undertaking of great advantage, but nobody to know what it is” also went public (en.wikipedia.org)

Aug 1720, price reaches £1,000: insiders cash out; investor panic sales; stock falls to £100. Isaac Newton, a victim, is reported to have admitted, “I can calculate the motions of the heavenly bodies, but not the madness of people.”

Isaac Newton is a funny character. Yeah, calculus and physics. But alchemy and speculation too? Only the winners write history.

Wall Street Lays an Egg

Pool managers had relationships with specialists to know the extent of pending buy/sell orders. Together, the pool managers generated trade events that made tick watchers want in on the action.

On making tick watchers want in on the action, describes Cathie Wood’s ARKK, which publishes intraday notifications. This extent of transparency is unprecendented, and it causes conversation in the trading world.

IMO, releasing intraday trades without releasing the rationale behind them is as open-source as releasing a compiled program.

Pool managers made tipsheet writers and market commentators tell of coming exciting developments.

Once the public flooded in to buy, the pool did the selling.

  1. A Random Walk Down Wall Street: Chapter 2. The Madness of the Crowds. Malkiel, Burton Gordon. Jun 1, 2019. ISBN: 9780393356939.
  2. Cathie Wood and Content Strategy. Ranjan Roy. https://themargins.substack.com/p/cathie-wood-and-content-strategy . Mar 24, 2021.