Title: A short history of financial euphoria

Author: John Kenneth Galbraith

Pages: 114

Dear reader,

Today I present to you one of the shortest investment books I have yet encountered, but one with a topic I have been most eager to learn from since my enhanced interest in the world of investing: the history of bubbles.

Why? Two reasons:

• Reason 1: There is an old saying: “…Those who cannot remember the past are doomed to repeat it…”.
• Reason 2: There is a psychological finding that we experience a greater sense of emotion when we lose something, contrary to the sense of emotion when we gain something

Therefore, it is best to learn of market bubbles from the past, so we can try and minimize their effects on our own portfolios. We will never be untouched, but we can try and get away with fewer scratches and bruises than the general population.

The book aims to illustrate briefly what the different crashes below were about, as well as some patterns that emerged with each bubble.

The book is broken down into the following chapters:

• Foreword (pg. 7)
• Chapter 1: The speculative episode (pg. 13)
  • It has become common knowledge, that the free market system is subject of recurring speculative phases.
  • The speculation is not limited to one area, but can appear in different sectors (company shares, bonds, precious metals, art work, etc.)
  • The elements to a bubble are:
    1. A new product or innovation is presented to the market.
    2. The product / innovation is presented by someone that is deemed to be a genius or is very charming.
    3. The innovation will require financing.
    4. When the price of the product rises, this gives other people the incentive to join and drive the price even higher.
    5. Eventually, people will grasp that the asset is overpriced, and there is a major sell-off.
    6. The blame for the repercussions and losses is not put on the act of speculation, but on an external factor or person.
  • Also, during the phase when the price seems to grown unendingly, there will be few people that will give a warning of the price being too highly valued. The majority of people will be quick to raise criticism against them, since, if they were correct, their investments will lose them money.
  • What each investor needs to learn to improve is the following:
    1. To maintain control and think objectively during any euphoric phase (have your goal in sight and do not get deflected by trends or get-rich-quick schemes)
    2. Do not get swept away by the crowd during the euphoric phase (i.e. fear-of-missing-out), even when the euphory is supported by renowned people
    3. Always maintain a good level of skepticism and do not overestimate your investment prowess when you have made a good financial decision.
• Chapter 2: The same denominator (pg. 23)
  • There are two misconceptions each investor should be sure to bear in mind:
    1. People have a short memory. Therefore, we may forget of the bubble that occurred only a few months / years ago, thinking that it will be different this time.
    2. All people that have a lot of money are highly intelligent. Therefore, we can place trust in their financial decisions, since they were intelligent enough to accumulate a large chunk of money already.
  • The private investor that has managed to accumulate some funds for investment purposes needs to be aware of those brokers and institutions that treat them very special. The investor may be made to feel so special and therefore lower their sense of skepticism, which can be financially detrimental.
• Chapter 3: The classic cases I: The tulip bubble, John Law and the Banque Royale (pg. 35)
  • Example of the Tulip bubble
    1. The tulips were adopted to be a status symbol. Some tulips were more rare than others and people therefore secured the right to buy one in the future.
    2. No historic records are available to break it down, who it was that managed to sell this as a high priced item
    3. The price for rarer ones is higher, therefore someone will have to pay more for this one. The next buyer will have to pay more to finance it.
    4. More and more people (from Holland and countries nearby) all participate
    5. When the supply of these rare tulips came, there was an over-supply, which resulted in the significant drop in prices. Another reason for the sell-off was that there were some buyers that were becoming afraid of the high valuations and instead sold their rights off.
    6. The blame could not be assigned to a single person.
  • Example of the Mississippi bubble
    1. The innovation was to acquire shares in a French company, which had the sole rights to conduct business with the French colonies in the New World (modern day United States of America)
    2. John Law was the inventor for this company and “innovation”.
    3. John Law made it attractive to buy a share in the company that was the sole profiteer from the riches that lay in the Americas
    4. The news of the riches was spread further and further and more shares were issued. Furthermore, the first dividends were coming in (paid for from the money collected from issuing new shares) that drove more people to wanting to participate.
    5. One count was not permitted to acquire shares in the company and therefore instructed the bank to convert his paper money holdings into gold. When word spread that one prominent member of society had converted his money to gold, people thought their money was not good (since France had been bankrupted by their kings before) and they all started to sell their shares.
    6. Blame was given to John Law for the construct of the bubble.
• Chapter 4: The classic cases II: The south sea bubble (pg. 51)
• Chapter 5: The American tradition (pg. 61)
• Chapter 6: 1929 (pg. 77)
• Chapter 7: New edition: The October crash 1987 (pg. 93)
• Chapter 8: Reprise (pg. 109)

In the final chapter the author notes that these elements may not be very clear to spot, and no one will ever be able to predict exactly when the next bubble will occur, but with time, each investor would hopefully become better equipped to lower the odds of losing significant sums of money from trend investments.

Summary:

The examples given how how the different bubbles went through the various phases is well explained in a brief summary and shows clearly how different elements continued to emerge from each individual bubble. It therefore gives the reader good advice for dealing with trending investments. The book is not written too complex, with too much history or research data, but kept simple for the every day investor to grasp the important matters.

Therefore, the book will receive a rating of 4.3/5.

Happy investing! 🙂

Link (German): https://amzn.to/4shc1T5

Link (English): https://amzn.to/3LgX02Z