What can past stock market bubbles teach you about your investment portfolio?
Everywhere you look when reading investment news and information, you’ll see this risk warning posted nearby:
“Past performance is never indicative of future performance.”
It’s undoubtedly true, of course. There are many metrics you can look at to assess and then logically invest in companies that may rise in value, but past performance can never be one. Just because something happened in the past never guarantees that it will happen again.
Even so, it’s useful to scour the past from the perspective of finding investing lessons on what not to do. Indeed, there’s a lot to be learned by looking back and assessing the mistakes of others to inform our strategies moving forwards.
In particular, stock market and investment bubbles make for a great training ground to do this.
Here’s what past mistakes and stock market bubbles can teach us about investing today.
You can’t eat a tulip
Let’s start by going back to the 17th century, where the supposed first ever speculative investment bubble is thought to have occurred in the Dutch Republic.
The Dutch are known to be the founders of many key financial institutions, including the stock market. Crucially, as a part of this, they’re also thought to have created the first futures contracts.
This led to a period now referred to in history as “tulip mania”, in which Dutch merchants speculatively traded on the price of tulip bulbs.
Tulips were thought to be a valuable commodity, as their popularity and price made them lucrative. Contracts were repeatedly exchanged, and the price rose rapidly – only for the bubble to inevitably burst.
Suddenly, buyers were left with contracts worth next to nothing in a saturated market. This was disastrous for many merchants and their families because, as they quickly found out, you can’t eat a tulip.
In this instance, blindly following the crowd without thinking about whether the investment was suitable and sensible saw many people lose a great deal of money.
Isaac Newton and the South Sea bubble
Of course, it’s not just the rushing masses that can make errors in their investment judgements. Even geniuses are at risk of investing in the wrong way.
A prominent example is that of Sir Isaac Newton, the mathematician and physicist credited with the discovery of the theory of gravity.
Newton was no doubt a smart man, but he was just as fallible to the whims of the market as anyone else.
He had initially cashed in on some successful gains in the South Sea Company, a business designed to help reduce the national debt.
After these successes, Newton is thought to have reinvested his entire worth into the company. Supposedly, this investment was made at the height of what turned out to be a bubble. And, when the prices inevitably came crashing down, he lost a fortune.
Obviously, Newton was not alone in his mistake. Many thousands of people had to make the same error to drive the price of the company up before it ultimately fell.
But Newton’s mistake is a costly lesson: after a successful investment, he went back in again expecting the same results.
When all was said and done, Newton is reported to have bemoaned: “I could calculate the motions of the heavenly bodies, but not the madness of people.”
The dot-com bubble
Of course, it’s easy to look back and judge these primitive investors for their mistakes. How were people 400 years ago supposed to know what a stock market bubble was when they were a fairly new phenomenon?
Yet, you only need to look back just a couple of decades to find more examples where the logic of the masses was just as imperfect.
One such case was that of the dot-com bubble in the late 1990s, in which investors piled money into new internet startups with the internet suffix “dot-com” in their names.
Rather than focusing on the metrics that matter to a company’s success, investors became obsessed with the idea that new tech companies would bring profits, regardless of the function that the business was supposed to perform.
Ultimately, the new companies began running out of money as they failed to produce the returns, instead squandering their money on so-called “dot-com parties” at launch rather than working on their products and services.
Those investing in the dot-com bubble lost their money for breaking a rule that investing titan Warren Buffett believes to be fundamental to a successful strategy: “Never invest in a business you cannot understand.”
We use an evidence-based approach to target slow, steady returns
So, what it is that these mistakes teach us? More than anything, in each of these cases, investors were drawn in by the allure of huge returns for little effort.
Generally, this is not going to be a sustainable way to invest. Chasing returns seems tempting, but the more sensible course of action is more often than not to take a long-term view of your investments.
That’s exactly how we look to invest your money at Britannic Place. Predominantly using a service provided by EBI Portfolios, we take an evidence-based approach when designing our investment strategies, targeting slow and steady returns.
Of course, we’ll never rest on our laurels with our providers. We assess the best options annually to ensure that the service we provide is still the most suitable one for our clients.
Crucially, we invest your money in a way that’s suitable to your goals and tolerance for risk. That way, your investments can pull in the same direction to help you achieve what you want out of life.
By working with us at Britannic Place, you can be entirely confident that your money will be invested in judiciously selected, evidence-based portfolios with you and your targets at the centre.
Get in touch
Want to find out even more about how we invest your money so that you can achieve your future goals? Email firstname.lastname@example.org or call 01905 419890 to speak to us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.