South Sea Bubble

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.