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Written by Travis Morien
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Four general principles seem to emerge from a study of financial bubbles: - An irresistible image of instant wealth is presented, forming a crowd around it.
- A social reality is created. Opinions converge and become "facts". Experts become cheerleaders, exhorting the crowd onward.
- The image suddenly changes, and anxiety replaces overconfidence. The bubble breaks and panic ensues.
- We, as investors, do not learn from our mistakes. Somehow everything seems different each time, and yet it is quite clear that events proceed in pretty much the same manner every single time.
This table appears in Contrarian Investment Strategies: The Next Generation, by David Dreman. | | High price | Low Price | Decline from high | | Holland, 1637 | | | | | Semper Augustus | | | | | (tulip bulb) | 5,500 Florins | 50 Florins | 99% | | England, 1720 | | | | | South Sea Company | 1,050 Pounds | 129 Pounds | 88% | | France, 1720 | | | | | Mississippi Company | 18,000 Livres | 200 Livres | 99% | | IPO Bubble, 1961-62 | | | | | AMF | $66 3/8 | $10 | 84% | | Brunswick | $74 7/8 | $13 1/8 | 82% | | Lionel | $37 7/8 | $4 1/2 | 88% | | Transitron | $42 3/8 | $6 1/4 | 85% | | IPO Bubble, 1966-70 | | | | | Leasco Data Processing | $57 | $7 | 88% | | Litton Industries | $104 | $15 | 86% | | National Student Marketing | $143 | $3 1/2 | 98% | | University Computing | $186 | $13 | 93% | | IPO's 1979-90 | | | | | Ask Corp | $130 5/8 | $1/32 | 100% | | Cullinet Software | $33 3/8 | $4 1/8 | 88% | | Floating Point Systems | $46 | $7/16 | 99% | | IPOs. 1989-97 | | | | | Boston Chicken | $41 1/2 | $6 7/16 | 84% | | Secure Computing | $64 1/2 | $11 13/16 | 82% | | Objective Systems | $56 1/2 | $8 3/8 | 85% | | Shiva | $87 1/4 | $8 9/16 | 90% |
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