When a farmer in Holland planted a tulip bulb, did they know it would be worth 6 acres of land one day? In 1634, when Tulip Mania began, the price of tulips skyrocketed. By 1635, 40 tulip bulbs bought 1000 tons of butter, 3000 fatted sheep, or 2500 full-grown oxen. But in February of 1637, the tulip market disappeared and the bubble burst. Those still riding the tulip train lost their shirts. What happened? Why did the tulip bubble burst?
The value of tulips was based on stories and projections rather than hard facts. This created prices which didn’t reflect actual value. When reality caught up with speculators, the bubble burst.
We’ve seen several bubbles come and go. During the dot-com era, stock prices were based on ideas. Was the Internet a great idea? Yes. Was it worth the projections? No. When its true value was realized in the market place, stock prices crashed, numerous companies went out of business, and those who had invested lost everything.
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