Herd behaviour is the tendency for individuals to mimic the actions of a larger group. Individuals in the group make decisions that they normally would not have otherwise.
In the world of investing this herd behaviour can lead to prices of certain assets being driven up to ridiculous proportions. Unfortunately this often leads to a big crash soon after.
The Dutch Tulip Mania
One of the most famous and earliest financial bubbles was the Dutch Tulip Mania of the 1600′s. Back then the Netherlands were already quite fond of tulips and collecting things in general.
Tulips proved to be a fantastic gentlemanly pursuit for Dutch men. There were many varieties to be examined, and by the 1630′s many tulip brokerages started to pop up around the country.
At first trade was limited, but as professional growers entered the market the prices rose higher and higher. That’s when the speculators came out.
Things got out of hand quickly. A popular bulb went from 125 florins a pound on New Year’s Eve 1636 to 1500 florins by Feb 3, 1637! That’s 10 times the annual salary of a skilled craftsman.
Here are 3 other collecting fads that got way out of hand:
1) Beanie Babies
In the late 1990′s, Beanie Babies became huge – people were buying and selling rare Beanie Babies for as much as $5000 and expecting their collector’s item to keep on rising in value. Gullible children and irresponsible adults alike were taken in. Collectors would keep each toy’s price tag attached so as not to destroy the value of the Beanie Baby – said to fall by 50% once the tag was removed.
Ty Warner, the creator of the toys did a brilliant job of manipulating supply and demand. He only sold small batches of each new Beanie Baby, refusing to deliver large quantities to bigger distributors. He would also “retire” each Beanie Baby after a short time – creating a weird sort of obsession not unlike the hysteria that comes with the launch of a new Apple product.
There is a video called “How to Spot Counterfeit Beanie Babies”, the title of which speaks volumes. It’s also incredible that people thought Beanie Babies would be worth thousands of dollars in the future. The 1998 edition of the “Scholastic Beanie Baby Handbook” listed the 1998 prices of various Beanie Babies, when they were first released, as well as their estimated price in 2008.
Strikes the Dark Tiger was estimated to reach $1000 in value by 2008. If you held on to Teddy the violet bear until 2008 then you could expect to grab a cool $4000-$5000.
These days you can grab a Beanie Baby for $10 on eBay.
2) Baseball Cards
OK so there are definitely a few baseball cards that could change your life.
The most valuable baseball card of all time is the Honus Wagner T206. When it first came out in 1933 the card was listed for a price of $50, making it the most expensive baseball card in the world at the time. There were only 40 cards ever distributed and the Wagner T206 would go on to rise sharply in value over the years. The card exchanged hands numerous times, on each occasion taking pause to skyrocket in value. In 2000, the card was sold for $1.27 million, then again for $2.35 million before being sold again to the owner of the Arizona Diamondbacks for a cool $2.8 million!
From the 1950’s to the 70’s the baseball card market was pretty quiet. A few collectors traded between each other but vintage baseball cards exploded in the 80’s and into the early 90’s. There were a few reasons.
- The media latched onto baseball cards and hyped them up as collector’s items.
- Price guides appeared, like Beckett Baseball Card Monthly, providing sources of market valuation for these cards.
- Wall Street started to talk about baseball cards as legitimate investment alternatives to stocks.
At its height the number of dealers reached 10,000 with industry sales topping $1.5 billion in 1992. Today, there are 200 dealers of baseball cards and industry sales are a paltry, by comparison, $200 million.
The bubble would burst in spectacular fashion by 1993. Competing baseball card manufacturers who flooded the market and print runs of cards that numbered in the millions turned once valuable cards into worthless pieces of cardboard. Baseball cards had become such an expensive hobby that kids had moved onto to more practical pursuits. Making way for video games and pogs, and leaving the world of baseball card trading to middle-aged men who disguised their hobby under the thin veneer of investment.
3) Comic Books
Best… Fad… Ever…
At one time comic books were all over the place and worth about a dime per issue. By the mid 1980’s there were numerous specialty shops that only sold comic books and a sizeable collector’s market had formed.
From 1985 to 1993, comic book speculation reached its highest levels.
A copy of Action Comics #1 – marking the first appearance of Superman – cost $5000 in 1984.
Detective Comics #27 – the first appearance of Batman – sold for $55,000 in December 1991. That same year, Action Comics #1 fetched an eye-watering sum of $82,500.
Once again the media had been involved – profiling the earning potential of comic books and getting more and more eyeballs onto the scene. Mainstream comic book publishers started to pander to the collector’s market, releasing issues with special covers and gimmicks that they knew enthusiasts would go nuts for.
The comic book bubble collapsed between 1993 and 1997, a time period in which two-thirds of all comic book specialty stores would shut down.
Retailers ignored the fact that while certain issues sold well, many of the comic books they ordered sat collecting dust on the shelves. The market had become oversaturated over time and eventually went bust. The comic book giant Marvel, the company responsible for the Avengers movie you likely saw this month, was even forced to declare bankruptcy in 1997.
How Speculative Bubbles Work
Each one of the fads described above is an example of a bubble and every bubble has four basic phases:
- A grand new development that excites the markets
- Intense euphoria over the development
- A boom in sales and speculation
- Panic, as the boom turns to bust
Often the people who make money in mania markets are speculators who sell to other speculators. They are the lucky ones who get to exit the market while others are left holding the ball.
To learn more about psychological forces that drive human behavior, check out this course on behavioral finance.