South Sea Bubble
Categories: Econ
Sometimes in life, things don’t really go the way we thought they were going to go. When we’re talking about something like a ballgame or an iffy new casserole recipe, that’s not really such a big deal. But when we’re talking about an investment, it can be a very big deal indeed.
The “South Sea Bubble” is one of history’s best that-didn’t-go-the-way-we-thought-it-would stories…and it’s an excellent cautionary tale against the dangers of speculative investing. Ready to hear it? We thought so. Buckle up, folks, ‘cause it’s going to be a wild ride.
Back in 1711, the South Sea Company was formed in Great Britain. It was a public-private corporation whose main purpose was to use trade to help reduce the national debt. Sounds like a good plan, right? And it was…for a while. People kept on investing in the company, believing that its legal monopolies on the shipping and trade businesses were going to bring in beaucoup bucks to shareholders. What the company didn’t tell anyone was that, uh...it wasn’t really making any money on that monopoly. In fact, it wasn’t really making any money at all. What the company was doing was shaking hands, kissing babies, and bribing people in power to make sure that everyone—especially those investors—thought everything was gravy down at South Sea.
Well, as one might expect, reality eventually caught up with the South Sea Company. And when it did, the stock sank like a ship on the South Seas. (We’ve been waiting to use that one.) Between August and December of 1720, the stock price dropped from £1,000 to £100. Everyone freaked out, a ton of investors lost their shirts, and several government officials either resigned or were impeached after it was revealed that they received bribes to talk up South Sea stock.
All in all, it was a huge fiasco, and it all boiled down to speculation. And this is why we should always do our own research before making any kind of investment.
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Finance: What is a Bubble?5 Views
Finance allah shmoop what is ah bubble All right well
this is a bubble See what happened there got bigger
and bigger and bigger And then it popped and here's
the stock market from about nineteen Ninety two until about
two thousand It got bigger and bigger and bigger And
then it popped And yet was a bubble not just
a big fat bull market It was a crazy ludicrous
tulip mania Kind of time like start ups with almost
no revenues trading and billions of dollars Yep And tulip
mania That was a really thing One tulip sold for
forty grand go figure wasn't like if you ate it
you lived forever So yeah it was a bubble So
what caused the ninety nine bubble Well greed and it
wasn't good At least for some The internet had come
along It was a new thing consumers by the millions
could download in the privacy of their homes Art films
Yeah That's what we'll call them art films by the
terabyte money was flowing from silicon valley investors into startups
at record pace hoping to take advantage of this new
amazing internet thing and the valuations of companies got higher
And higher and higher Nasdaq went up some four hundred
percent in just half a dozen years and the blessed
cos traded at one hundred times trailing revenue not earnings
but revenue So if you think about the idea that
if you invest a dollar and you want to get
more than that back and that dollar comes from profits
of companies than one hundred times revenues cos we're probably
something like five hundred times earnings or more So for
one hundred dollars oven investment you've got like a dollar
of revenues in twenty cents of potential earnings Like maybe
a a decade later maybe yeah that's a bubble and
it burst At least you don't have that danger with
actual tulips or bitcoins Yeah they take bitcoins when you
buy tulips Would be kind of a good marriage there