Friday, May 18, 2012

Facebook Mania - Twenty-First Century Tulipomania?

The recent mainstream media coverage of the "Facebook Event of the Century" has me thinking that one of two things has happened.  First, either it is a very, very slow news cycle or, second, we have entered yet another stock mania.  My suspicion is that this is yet another mania, created by the "pump and dump" set and very heavy coverage by the media.

By way of comparison, let's take a look back at one of the original manias, Holland's tulip mania of the 1630s, also known as "tulipomania".  Tulips were highly sought after by the wealthy in parts of Europe.  By the 1630s, even the middle classes strove to own tulips since they were seen to be an important part of maintaining one's social status.  In Holland, since tulips bloom in mid- to late spring, the buying and selling of tulip bulbs generally occurred during the summer months so that prospective buyers would have a chance to view the flower and have an idea of what they were buying since the value of the bulb varied with the appearance of the flower.  Once the bloom had died, the bulb was removed from the soil.  The problem with this system was that the flower varied from one season to the next.

In 1635, prices for tulip bulbs began to rise and bulbs, rather than being sold individually, were sold by weight while they were still in the ground.  The weight was measured in aasen, a unit of measurement that is less than 0.0017 ounces.  This meant that larger bulbs cost purchasers more than smaller bulbs and since tulip bulbs become heavier after they are in the ground for a period of time, the price of a heavier bulb could increase by 300 to 500 percent even if the price by weight remained the same.  One advantage to the larger bulbs was their increased ability to produce smaller offset, the small bulbs that are attached to the mother bulb.  This also made larger bulbs more valuable.

The most valuable tulips were those with contrasting, variegated markings.  Most desirable were those that had flames of red or purple against a white or yellow background.  This variegation is created by a mosaic virus that is carried by aphids.  Unfortunately, growers had no idea which bulbs would result in these markings and, on top of that, infected bulbs were less likely to produce the smaller offset bulbs since they had been weakened.

In 1635, the price of tulips began to rise.  Purchasers bought their bulbs in the winter, were handed a promissory note and took delivery in the summer, one of the first futures markets.  Buyers promised to pay a specific price for bulbs in the ground at a specific date in the future, speculating that the bulbs would be more valuable in the future at which time the promissory note could be sold to the new buyer in the hope of realizing a quick and risk-free profit.  By the last two months of 1636, speculation was rampant with the price of the most desirable tulips doubling or tripling.  Many speculators suddenly became rich which enticed other speculators who wanted to get in on the party.  Speculators paid for bulbs using cows, land, shops and houses; in one town, a farmhouse was exchanged for three tulip bulbs.  Buyers and sellers automatically assumed that the bulbs could be sold at ever-higher prices.  The trade in tulip bulbs was so lucrative that they were even traded on the Amsterdam Stock Exchange according to some sources while others state that tulip trading was always on the margins of Dutch society.

At its peak, a single tulip bulb weighing 410 aasen (0.7 ounces) sold for 3000 guilders.  This was approximately 20 times the annual salary of a skilled craftsman and, at the time, would have bought eight pigs, four oxen, twelve sheep, twenty-four tons of wheat, two tons of butter, a thousand pounds of cheese and a ship.  The record price for a bulb that was to be split into two was 5200 guilders or 35 times the annual salary of an average Dutch citizen.

The tulip market crashed (as do all manias) in rather spectacular fashion.  At one auction, the "greater fool" did not show up and, bulbs that had been priced at 5000 guilders a few weeks earlier, fell to one hundredth of that amount.  In the end, the promissory notes were deemed valueless and only contracts made after November 1636 were valid; buyers in these contracts would be freed from the contract upon the payment of 10 percent of the contract's value.  The few who had enriched themselves by selling their bulbs at the height of the market stood in sharp contrast to many families who were ruined by their  "investment" in tulipomania, many merchants and noblemen ended up living on the streets as a result of their foolishness.

While I realize that the Facebook initial public offering is somewhat different that tulipomania, there are some parallels.  People are making the assumption that Facebook will be the next Microsoft or Google and want to get in on a “good thing” before it is too late. While that may be the case, Facebook's valuation is purely speculative at this point and, most importantly, unlike Google and Microsoft, for now, they are pretty much offering a single product.  As we all know, consumers are a particularly finicky lot with extremely short attention spans; what is "cool" today, may be "crap" tomorrow a lesson that does seem very hard for humanity to learn.

On the upside, a few Facebook insiders just became multi-millionaires.  Apparently, history really does repeat itself.



  1. ... "Facebook Event of the Century" has me thinking that one of two things has happened...

    Two things HAVE happened. HAVE not HAS. Please proof read and check grammar ; your opening paragraph killed the value (let alone perception of intellect) in your overall message.

    1. "Has" is correct. The subject of the sentence is "one" and "of two things" is a relative clause.

    2. ...get in on a “good thing” before it is too lated...

      Another typo. I agree, get it checked first - will have more validity.

    3. Facebook IPO (FB NASDAQ) Launch Date Live Video here

    4. Anonymous, I would suggest a remedial course in English Grammar before dismissing the work of another on the basis of a non-existent error. The subject is singular, not plural.

    5. How inane can readers be?
      This is a BLOG posting,which is perfectly understandable, but some "Pomposity Practitioners" seem to feel the .net blog responders must qualify with a minimum of a Masters Degree or PhD in English, as a pre-requisite for anyone reading, or, Heaven Forbid, posting a reply.

      Too over the top! Cheers!

  2. ONE of two things HAS happened. Idiot

  3. Replies
    1. You're welcome.
      -Conan the Grammarian : )

  4. No way to get some traction to the action on a lonely blog posting .... post was intentional to raise the flames :P

    -Anonymous (AnonyMOUSE) @ 7:41 ;)

    1. Right and we believe ya...or should I say we believes ya :)

  5. What is facebook?

  6. I don't think tulips were traded on the stock exchange. The tulip trade was not strictly legal as the government had already said that contracts in tulips could not be enforced.

  7. From the book Tulipmania:

    "Hundreds of traders were licensed to deal on the stock exchange—there were perhaps four hundred official beurs brokers in the 1630s, and they were joined on the trading floor by up to eight hundred unlicensed freelance dealers who specialized in trading small packages of shares at low prices. In one description of the exchange, the contemporary writer Joseph de la Vega observed one such freelance dealer, who “chews his nails, pulls his fingers, closes his eyes, takes four paces, and four times talks to himself, raises his hand to his cheek as if he has a tooth-ache, and all this accompanied by a mysterious coughing.” Vega does not mention what his small-time broker was hoping to buy or sell for his handful of guilders, but he had a considerable choice: By 1636 at least 360 different commodities were traded on the Amsterdam exchange. Tulips, however, were not among them.
    This fact may come as a surprise to those who assume that a financial calamity with the reputation that the tulip mania enjoys must necessarily have been serious and widespread and have had a significant impact on the stock market, on trade, and on the Dutch economy in general. Nothing could be further from the truth. The speculation in tulip bulbs always existed at the margins of Dutch economic life. It was conducted by amateurs, not professional traders, and was never subject either to the customs (however peculiar) or to the regulation of the stock exchange. The mania took, in fact, the form of a rough but intended parody of the trade in commodities and shares that flourished on the beurs. It was the province not of financiers experienced in the ways of business, but of country people and poor city dwellers who had, when they started dealing in bulbs, almost certainly never owned a single share in their whole lives.
    The fact that the tulips were not dealt on the stock exchange does not mean the flower business was not regulated. In fact, it soon evolved into a complicated, even ritualized affair in which buyer and seller dealt according to fixed rules and were united by mutual obligations, agreed to in front of witnesses, and noted in writing. Like the brokers who once congregated on the New Bridge, the tulip traders needed somewhere to transact their business. Like the brokers, some of them used the house of God upon occasion; when the mania took place, the local church was a general meeting place pressed into use by everyone from local merchants to courting couples. Most, however, found it far more comfortable to buy and sell their bulbs in a convenient tavern. The tulip trader’s stock exchange was his local pub."

  8. Thanks for the quote. One of the two sources that I found states that bulbs were traded on the stock market. Interesting divergence of opinion among historians.

  9. Here's another interesting quote, this probably happened because of China's trade surplus. Holland also had a kind of trade surplus at the time because they had pushed Spain out, this left them with a lot more money saved from paying tribute. Also a lot of people made money financing speculative trade voyages, the ships either didn't make it or came back with a fortune. So there was an upsurge of money suddenly available that people could invest.

    You would enjoy reading the book. Here's another excerpt that would make an interesting analysis by someone:

    "The most recent manifestation of the old virus occurred as recently as 1985, when a mania broke out in China that followed the template of the tulip craze almost exactly. In this case speculation centered on yet another bulbous flower, the jun zi lan plant, or Lycoris radiata—the red spider lily. This lily grows small, funnel-shaped flowers that coil together like a tangled skein of wool. Tremendously long, curved stamens project far beyond the leaves to give the plant a delicious air of delicacy. The spider lily originated in Africa but came to China in the 1930s and was cultivated extensively in the Manchurian city of Ch’ang-ch’un. It was at first a favorite of the old ruling classes of the city, and for a while it was a mark of distinction for a patrician family to grow several different varieties of jun zi lan. The Communist takeover put a stop to the small market for bulbs that had evolved by the end of the 1940s, but the spider lily remained very popular and was eventually designated the official flower of Ch’ang-ch’un. By 1980 it was estimated that half of all the families in the city grew it.
    A jun zi lan mania broke out in earnest only a few years later, when the Chinese government allowed a few modest economic reforms. The situation in Ch’ang-ch’un was then quite similar to that in Holland during the 1630s. Entrepreneurial activity was encouraged, but while there was plenty of desire to make money and an abundance of energy to tap, there were very few opportunities to invest any surplus cash. In these circumstances, the spider lily growers of the city took advantage of the growing demand for their flowers from neighboring regions, and as prices began their inevitable rise, * speculation in jun zi lan bulbs followed right behind.
    In 1981 or 1982, spider lily bulbs were selling for 100 yuan, about $20. This was already a substantial sum, given the low annual salaries prevalent in China. But by 1985 bulbs of the most coveted varieties are reported to have changed hands for the astronomical amount of 200,000 yuan, or about $50,000, an amount that puts even the sums paid at the height of the Dutch tulip craze to shame. Thus, while Semper Augustus at its peak might have commanded between five and ten thousand guilders a bulb, which was four to eight times the income of a well-off merchant, the highest prices quoted during the jun zi lan mania were equivalent to no less than three hundred times the annual earnings of the typical Chinese university graduate—quite a staggering sum.
    In such circumstances it is unsurprising that the spider lily craze was short-lived even by the standards of flower manias. It collapsed in the summer of 1985, apparently because confidence in the fledgling trade had been undermined by a series of critical newspaper articles that described the speculation in bulbs as madness. The whole lily bulb market was quickly flooded with panicked dealers desperate to sell, and bulb prices fell sharply. Just as the Chinese boom had exceeded even the heights attained during the tulip years, so the crash, when it came, was still more severe. By the time the market for spider lilies stabilized at last, prices had plunged by anything up to 99 percent."

  10. I learned that story watching Wall Street (the 1987 one not the dog one from 2 years ago.)

  11. Very very interesting and nice story .But i would like to say that what is Facebook ??one or two things has happened ..what is this ??
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