March 2021: Tulips & Bubbles
MODERNIST’S ASSET CLASS INVESTING PORTFOLIOS ARE STRATEGICALLY INVESTED WITH A FOCUS ON LONG-TERM PERFORMANCE OBJECTIVES. PORTFOLIO ALLOCATIONS AND INVESTMENTS ARE NOT ADJUSTED IN RESPONSE TO MARKET NEWS OR ECONOMIC EVENTS; HOWEVER, OUR INVESTMENT COMMITTEE EVALUATES AND REPORTS ON MARKET AND ECONOMIC CONDITIONS TO PROVIDE OUR INVESTORS WITH PERSPECTIVE AND TO PUT PORTFOLIO PERFORMANCE IN PROPER CONTEXT.
tulips: a lesson in investing bubbles
Tulips were first imported from Turkey to Western Europe in the late 1500s. The unique, exotic look of these flowers soon captured the attention of the upper classes and quickly appeared in the gardens of affluent Dutch aristocrats. Over the course of the next several decades, tulips became a status symbol of wealth and sophistication highly sought after by the Dutch middle class. This fashionable craze led to tulips being listed on the Amsterdam stock exchange in 1636.
At its peak, a single tulip bulb could be worth thousands of florins, a gold coin of varying weight and purity. Historians debate their exact value at the time, but a rough estimation would put this amount equal to $500,000 or more in today’s dollars!
Could such an amazing run last? Of course not, and tulips’ value would come crashing back down to earth over a three-year period ending in 1638. This is regarded as one of the earliest, most extreme asset bubbles in history. And like the tulip trade centuries ago, markets have provided examples of this phenomenon in recent decades and even in the first few months of this year, 2021.
excited by an investment? be wary
GameStop and Bitcoin have recently caught the attention of investors and garnered headlines as money piled into both and they generated atmospheric returns, high volatility, and the occasional swift price correction.
Why? That can be a difficult question to answer given the short time frame in which each swing occurred.
Some might point to excess liquidity in the markets or a pent-up demand that has fueled a collective fear of missing out among investors. Others might point to markets becoming less efficient. Maybe quarantining led to bored investors impulsively buying and selling based on news, when they weren’t online retail shopping?
But, what does work?
Benjamin Graham, the late economist regarded as the father of value investing, is quoted as saying, “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”
This wisdom remains true. Investors tend to purchase securities in the short run as if they were participating in a popularity contest. And thus, security prices move rather quickly up or down.
This is no different from the 17th century Dutch and their tulips. The excitement of this style of short-term investor behavior can cause a disconnect between the price of a security and its fundamental value. However, as efficient markets continue working over time, evidence shows that the price of a security will ultimately come to reflect the fundamental value of the issuing company.
MODERNIST’S INVESTMENT PHILOSOPHY
This is a one of the evidence-based, long-term perspectives that backs Modernist’s portfolios. Our investment philosophy aims to avoid short-term popularity contests, which often reflect nothing more than short-term noise. Instead we leverage decades of collective market knowledge.
If you have questions about your investments, charitable giving strategy, or are looking for a partner to help you make progress towards your financial goals, reach out. We’re ready and happy to help.
Cheers,
Georgia & Team Modernist
