Tulip mania

In the recent movie Wall Street: Money never sleeps, Tulip mania was referred to as the first economic bubble in history. Below is a brief history lesson I have extracted from Wikipedia.

Tulip mania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed. At the peak of tulip mania in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. It is generally considered the first recorded speculative bubble (i.e. economic bubble), The term "tulip mania" is now often used metaphorically to refer to any large economic bubble (when asset prices deviate from intrinsic values).

The event was popularized in 1841 by the book Extraordinary Popular Delusions and the Madness of Crowds, written by British journalist Charles Mackay. According to Mackay, at one point 12 acres of land were offered for a Semper Augustus bulb. Mackay claims that many such investors were ruined by the fall in prices, and Dutch commerce suffered a severe shock.

Reiterating from above, an economic bubble occurs when asset prices deviates from intrinsic values. So to avoid a bubble (according to this definition), one should conclude the ability to estimate intrinsic value is critical.

To succeed in Investing, you need to have the ability to conduct your own research in order to make a sound decision. Buying shares from a hunch, hoping the price will go up; or following the crowd is not a successful investment strategy.

For shares investments, there are 2 broad strategies one can adopt,, namely Value Investing (Fundamentals) and Technical Analysis (Charts). As an accountant, Value Investing appeals to me since I am familiar with Financial Reports. I was also fortunate enough to find a great Value Investor who is willing to share his methods of calculating Intrinsic Value and has benefitted alot from him.

That said, I think it is more important to have a strategy, rather than which strategy is better. One main reason for having a strategy (system) is that it allows you to execute investment decision based on logical assessments, not emotions. This is one of the pitfalls for new investor. In my next post, I will share my lessons learnt from my first 4 trades, which are valuable to me. And yes, I made the same mistakes like everyone else.