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.
References:
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