History Repeating Itself?
What does it all mean? You hear your co-workers and young adults talking about these ‘quick wins.’ AMC Theatres is considered a meme stock. The whole reason stocks like AMC exploded early on in the year is that a group of Reddit* users talked them up in the hopes of initiating a short squeeze. This occurs when many investors short a stock or bet that its price will go down, and the stock's price shoots up instead.
On the other hand, cryptocurrency such as Dogecoin and Bitcoin is so sensitive to news that any time a celebrity like Elan Musk endorses it or speaks up against it, its value has the potential to rise and fall.**
Unfortunately, many Millennials and Gen Z are getting their first experience and exposure to the stock markets with these unconventional market assets or investment methods. Both types of investments amount to speculation not investing. It's this volatility that makes both investments fairly risky endeavors.
He Who Does Not Remember History…
I believe it was the American philosopher George Santayana who said “Those who forget history are condemned to repeat it”
Millennials and Gen Z are too young to remember the Dutch Tulip Bulb Market Bubble. There is a lesson there for them so let’s take a walk-through time to the year 1634.
Tulip bulbs, along with potatoes, peppers, tomatoes, and other vegetables, came to Europe in the 16th century and commanded the same exoticism that spices, and oriental rugs did.
The Dutch Republic was the world’s leading financial and economic power in the 17th century. The Dutch recorded the highest per capita income in the world at that time. The Dutch affluence considered it proof of bad taste in any man of fortune to be without a collection of tulips. Following the affluent, the merchant middle classes of Dutch society sought to emulate their wealthier neighbors and demanded tulips too.
Charles MacKay, in his ‘Memoirs of Extraordinary Popular Delusions and the Madness of Crowds,’ said, “As prices rose, people got swept up in Tulipomania, spending a year’s salary on rare bulbs in hopes of reselling them for a profit. Nobles, citizens, farmers, mechanics, seamen, maid-servants, and chimney-sweeps dabbled in tulips.”
By the year 1636, the demand went so high that trading for the sale of tulips was established on the Stock Exchange of Amsterdam, and professional traders got in on the action. Everybody appeared to be minting money simply by possessing some of these rare bulbs. It seemed impossible to go on a fool’s errand. The price could only go up and the rage for tulips would last forever. Embracing this idea, people began using margined derivatives contracts to buy more tulips than they could afford.
The obsession to possess tulip bulbs was so great that the ordinary industry of the country was neglected. A single bulb of tulip costs as much as 4,000 to even 5,500 florins. This meant that prime tulips cost more than $750,000 in today’s money. The same tulip bulb, or rather tulip future, was traded sometimes 10 times a day. No one wanted the bulbs, only the profits…pure unadulterated greed.
By February 1637, prices began to fall and never looked back. Dealers refused to honor contracts, prices crashed, and people were left holding a lot of beautiful flowers that nobody wanted. The sharp decline was driven by the fact that people initially purchased bulbs on credit, hoping to repay when they sold their bulbs for a profit. However, as prices began to decline, holders were forced to sell their bulbs at any price and to declare bankruptcy in the process.
Though the Dutch economy did not collapse, individuals who speculated and participated in the buying and trading became impoverished overnight. By the year 1638, tulip bulb prices were back to normal.
Tulip Mania was a mass delusion…a feeding frenzy.
Millennials and Gen Z should pay attention to the moral of this story. Embrace investing but be very cautious with speculation. Millennials and Gen Z should also pray for wisdom to know the difference when purchasing Cryptocurrency and Meme Stocks.
*Reddit is where millions of people around the world post, vote, and comment in communities organized around their interests.
**NASDAQ.com, Cryptocurrency vs. Meme Stocks: Which Is Right for You? https://www.nasdaq.com/articles/cryptocurrency-vs.-meme-stocks%3A-which-is-right-for-you-2021-06-07