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Donkin's World: Earth Rarer Than Tulips

Richard Donkin highlights the folly of investing in financial bubbles.

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In the middle of the 16th century when the world seemed a much bigger place than it does today, anything sourced beyond the borders of Europe could be considered exotic and precious; and few discoveries excited the covetousness of men more than the turban-shaped variegated petals of the tulip.

The Swiss naturalist and father of modern zoology, Conrad Gessner, first excited a European craving for tulips when he described a plant he had seen in a Bavarian collection whose owner had been a sent a bulb by a friend living in Istanbul (then Constantinople).

Wealthy people in The Netherlands and Germany began to prize the flowers and were willing to part with extravagant sums for the finest specimens. The tulip became a hallmark of good taste and status, so much so, that the urge to possess a collection filtered down to the middle and merchant classes. By the turn of the century, anyone who was anyone had to have a private tulip collection. One trader in The Netherlands paid half his fortune for a single bulb.

What became known as Tulipomania is perhaps the most famous historical example of irrational exuberance that can overtake whole nations once they become gripped by what Charles Mackay in his book of the same name called Extraordinary Popular Delusions and the Madness of Crowds.

The mania for tulips that transformed a whole nation – one must only visit the Netherlands in the spring to encounter its lasting influence – did not last beyond a manic trading in tulip futures that collapsed in 1636.

The same fever that excited speculators in tulips has emerged time and again and we can see it again today. Recently the share price of a company rose by 66 per cent, simply because it changed its name to Rare Earth Minerals.

Rare Earth is the name for ores that are rich in certain scarce minerals such as scandium, yttrium, and the fifteen types of lanthanide. The vast majority of the world’s rare earth supply is today mined in Inner Mongolia, part of the Chinese Republic.

Rare Earth Minerals doesn’t have any earth – rare or otherwise; not even a plant pot of soil sufficient to nourish a tulip. According to the Daily Telegraph the company was called Zest, a loss-making music business. http://www.telegraph.co.uk/finance/markets/8232346/Rare-Earth-Minerals-333pc-rise-after-name-change-puts-Aim-under-fresh-scrutiny.html But penny stock investors seem to like the name and have been piling in to the shares.

Financial historians may recall the South Sea company formed in 1711. The company was granted a monopoly of trade with Spain’s South American colonies and subsequently assumed a large proportion of British government debt. Speculating in South Sea shares dramatically increased the company's value. Not to miss the boat, other speculative ventures began issuing shares on dubious potential.

Almost a hundred of what came to be known as bubble companies were created with all kinds of imagined ventures. Indeed one of them had not even imagined what it might do. This was the business that famously described itself as “a company for carrying out an undertaking of great advantage, but nobody to know what it is".

Nothing has changed. Just as the Dutch speculated in tulip bulbs, the Chinese have now begun speculating in French wine, driving prices of the best French wines to more than four times their normal value in 2010. http://www.chinapost.com.tw/business/asia-china/2011/01/04/286223/Chinas-nouveau.htm This year it will probably all happen again, partly because some are prepared to deliberate on whether the Chinese market for high-priced French wine is sustainable. http://economistonline.muogao.com/2010/09/french-wine-bubble-in-china.html It is not: the speculation in French wine is a classic bubble in the making.

Two years ago Berry Brothers and Rudd, the wine merchant, predicted that the quality of Chinese wine will match that of Bordeaux wines within 50 years. Make that 20 years or even less. The Chinese move fast. They will soon produce enough fine wine of their own to meet growing domestic demand

The nature of bubbles is that they are not always apparent as they expand. But some don't care whether they are apparent or not and will happily disguise a bubble for their own benefit. The keenest gamblers see bubble speculation as nothing other than a matter of timing, getting out before the pop.

Meanwhile penny stocks such as Rare Earth Minerals are enjoying bubble fever all over again. We’re forever blowing bubbles.


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