I’ve had a few questions over the Christmas and New Year break about some of the get rich quick schemes which keep appearing.
Sitting in our armchair in the last few days of our lives, thinking back in time, what might we say is the biggest takeaway in terms of our learning?
It’s a big question.
A word which always springs to my mind, six months after every ‘event’ in life, or business, is that word ‘perspective’, the ability to hover over any emotional decisional maze in a helicopter. It’s so important to one of my friend’s that he has ‘Perspective’ written on the light switch at his door so he sees it as he leaves the home.
Perspective is important everywhere and definitely in finance.
Almost daily we are hit by catastrophic financial headlines that can be highly distracting.
31st October 2016: “The world’s finances are looking quite frightening right now”.
Four days later, the Nasdaq had fallen from 5205 to 5034 and panic was created everywhere with other alarming headlines. The Nasdaq never reached that low again, and five years later sat at 15,849.
Those alarmed by the headlines (there are good journalists, and awful order taking journalists) who leapt out of the market would have missed out on over 214 per cent return in those next five years.
The emotional mindset of deciding to leave or enter investments/pensions, and similarly the decision to turn a blind eye with apathy are crucial. The headlines will never give you a refund.
Get perspective on your finances
The world is always going to serve you fads, fashions or campaigns. It should be clear by now that there is often something and someone behind those.
In 1841, Charles Mackay wrote about Extraordinary popular delusions and the madness of crowds, and how society can seemingly sleepwalk or be herded into the most ‘extraordinary’ decisions. In reading it and arming yourself with how these decisions can be made, you can spot how they re-emerge.
The book clearly shows how many can easily become obsessed, full of self-delusion, and, with today’s speed of communication via the internet, anything horrific is possible.
In 1634, people were so delusional about tulips they didn’t bother going to work, or involve in daily life, instead trying to invest in tulips. The rich bought them to show off their wealth, until eventually they saw the folly of the crazy prices and then began to trade them – to the man on the street. For every buyer there is a seller and both can’t win in the price. That is as true of stocks as it is of tulips or a second hand car.
The mania continued, and in one instance, just one root of a tulip was sold for 12 acres of building land. When everything went pop, everyone was confused. This economy still existed surely? Finally, it was agreed in 1636 that all contracts made at the height of the ‘mania’ would become null and void. Tested in the Hague later, the view was that debts contracted in gambling were no debts in law.
Did this end Tulipmania?
No. You can see around you today how emotion affects society’s ability to think correctly. In 1769 (over 100 years after Holland’s collapse), England began an interest in tulips and sure enough, in 1835 one tulip bulb was sold for over £28,000 in today’s money.
‘History doesn’t repeat itself but it often rhymes’.
The years 1719 and 1720 brought us the Mississippi madness and the true understanding that confidence like mistrust can be increased ad infinitum. One selection from the writings of the time highlighted how joint stock companies were set up:
“Erect new stocks to trade beyond the line, with air and empty names beguile the town, and raise new credits first, then cry them down”. The ‘money mania’ Mississippi scheme plummeted the wealth of society at the time in minutes.
And so, a slow step, slow breath and the advice of your Solicitor, Accountant and Independent Financial Adviser is essential before you put ‘pen to paper’.
Be sure to trust the opinion of the company you are dealing with and yes, with money, be sure your adviser is Independent.
If you enjoyed Tulipmania exposed – Get perspective on your finances and want to read more about common sense investing, you’ll find more from Peter McGahan on our Finance channel.Last modified: January 17, 2022