Delusions and Madness in the Markets

As Old Man Winter wields his wrath in New England, we’re dreaming of spring and summer poring over a stack of seed catalogs that arrived in early January.  The catalogs offer far more than your average garden center with unique finds such as Bianchetto (Tuber Borchii) truffles or French Perigord Black Truffle Spores on the roots of oak, hazel or pine nut trees, currently trading at $400 for 15-30 grams.

Rarity and novelty drive prices, and when demand surges, they can skyrocket just like market futures did during Tulipmania, history’s first recorded speculative commodity fenzy. The 388 year anniversary of that infamous event was on Tuesday.

Known in finance as "greater fool theory,” this form of speculation involves buying an asset not for its intrinsic value, but on the belief that someone else will pay more in the future. Though tulip mania is usually cited as a cautionary tale of irrational exuberance and financial collapse, the real story, like many well-worn tales, is far more nuanced.

It all started with the charismatic Scotsman Charles MacKay who penned Memoirs of Extraordinary Popular Delusions and the Madness of Crowds in 1841. Mackay painted a dramatic picture of fortunes being squandered and financial ruin spreading through society when the Dutch market for tulip futures collapsed in February 1637. The story has since been debunked by English historian Anne Goldgar who painstakingly researched primary source data and found there wasn’t a single case of bankruptcy after the market crashed. However, it still serves as an important lesson in speculation.  

Investors, like gardeners though, thrive on speculation. Both grapple with the unpredictability of market whim and shifting conditions beyond their control. Yet a sudden frost can stunt a season’s growth even in the most carefully cultivated portfolios.

History proves that speculation, like valuations fueled by feverish optimism or in some cases, extreme skepticism, can’t outrun fundamentals forever. The question on everyone’s minds isn’t if a correction is coming, but when and how hard it will hit.

Mark Twain once mused: history does not repeat itself, but it does rhyme. As we plot our summer gardens, investors will be doing the same: weeding out what’s overgrown, what needs pruning and what may add value. Small caps have been holding their own, especially since their high tech brethren were upstaged last week by DeepSeek.

One thing is certain: While it may be too warm to snow, it’s never too cold for snow.

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