Investment Lessons From Tulip Mania
The root of one of my favorite investing strategies traces back to the 16th century... when a French botanist introduced an exotic Turkish flower to Europe.
As the tulip made its way from Austria to Germany, Holland, and England, it created a sensation.
The flower soon became the focus of one of the earliest recorded financial manias. As growers cultivated more and more varieties of colors, demand blossomed, and almost everyone wanted the newest colored bulb.
The tulip mania led to increases in prices that make the U.S. housing boom of the 2000s look tiny by comparison. At the height of the 17th-century boom, a single black bulb fetched 17 times the annual wage of a skilled laborer and totaled more than $50,000 in today's dollars.
Many bulbs carried the names of their growers or famous people. Names of single bulbs like Viceroy and Semper Augustus were bought and sold at ever-increasing prices. The most valuable bulb was named Admiral van der Eyck.
Another prized flower was the black tulip. Rumor has it that the first person to own a black flowering tulip sought out other black bulbs, bought them, and smashed them. That way, he remained the sole seller of black buds from his one and only black tulip plant.
By the mid-1600s, tulips were traded in designated places all over Holland. Trading invited speculation, which stoked the mania.
To bring order to the market and reduce their risk, florists in 1636 started demanding money up front for protection against the possibility that their buyers would renege on their deals nine months later when the bulbs were brought out of the cellars... If you owned bulbs, you could collect money up front in exchange for agreeing to sell bulbs in the future.
And voila... Dutch florists and the Dutch national parliament had created one of my favorite modern moneymaking tools...
When the bubble burst in the spring of 1637, those who sold the options had partially protected themselves by collecting money earlier. But those who were the buyers lost everything.
Today, people think of this way of trading as risky. But the real role of options – dating back to their innovation – is to reduce investor risk.
The truth is, this strategy is one of the most misunderstood and misused financial vehicles on earth. The popular press, and even your broker, will tell you it's guaranteed to lead to financial ruin. But that's just not true... if you understand how to trade them.
The way most people use this strategy increases the risk to their capital. But my technique is meant to decrease the risk to our capital. For years, I've shown readers how to dramatically alter their retirements for the better...
We can use this technique immediately to make income on what I consider "must own" investments... while assuming less risk than we would take on by simply buying shares.
But your only requirement here is that you must be open to a new investment idea.
You can use this technique to set yourself up for a steady stream of income, starting immediately.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
August 9, 2023