A bit more on manias.
Some interesting reading on this phenomena can be found in the book,
A random walk down wall street
, by Burton Malkiel. (WW Norton & Coy, 1996) Worth buying, even if
this author does
believe charting is useless. We've taken just a few quotes as follows.
be forgiven for thinking the latest net mania is something entirely new, or
very least, bigger than anything before, but you'd be wrong.
A few snippets from our random walk....
"Sky rocketing markets that depend on purely psychic support have
to the financial law of gravitation. Unsustainable prices may persist for
but eventually they reverse themselves. Such reversals come with the
of an earthquake; and the bigger the binge, the greater the resulting
hangover. Few .....
have been nimble enough to anticipate these reversals perfectly and escape
losing a great deal of money when everything came tumbling down."
Further update to our story on the Tulip mania in Holland, 1630's page 36
"Part of the genius of financial markets is that, when there is a real
a method to enhance speculative opportunities, the market will surely
The instruments that enabled tulip speculators to get the most action for
money were "call options" similar to those popular today in the stock
A call option conferred on the holder the right to buy tulip bulbs (call
delivery) at a fixed price (usually approximating the current market price)
a specified period. He was charged an amount called the option premium,
run 15 to 20 percent of the current market price. An option on a tulip
worth 100 guilders, for example, would cost the buyer only about 20
the price moved up to 200 guilders, the option holder would exercise his
would buy at 100 and simultaneously sell at the then current price of 200.
He then had a profit
of 80 guilders ( the 100 guilders' appreciation less the 20 guilders he
the option). Thus he enjoyed a fourfold increase in his money, whereas an
purchase would only have doubled his money. By using the call option it
to play the market with a much smaller stake as well as get more action out
money invested. The call is one way to leverage one's investment.
Leveraging is any technique that increases the potential rewards ( and
risks) of an
investment. Such devices helped to ensure broad participation in the
same is true today."
On the 1920's; page 44
"Conditions could not have been more favourable for speculative crazes.
had been experiencing unrivalled prosperity. One could not but have faith
business, and as Calvin Coolidge said, "The business of America is
business." Businessmen were likened to religious missionaries and almost
deified. Such analogies
were even made in the opposite direction. Bruce Barton, of the New York
agency Batten, Barton, Durstine and Osborn, wrote in "The Man Nobody
" that Jesus was " the first businessman," and his parables were "the most
advertisements of all time."
The euphoric mood of optimism and faith in business that prevailed in the
led to widespread enthusiasm about real estate and the stock market. It
only natural that Americans, having conquered an entire continent, would
to real estate booms. One of the greatest centred on Florida in the middle
climate was just right. The population was steadily growing and housing
was in short
supply. Land values began increasing rapidly. Stories of investments
tripling attracted speculators from all over the country. Easy credit
terms added fuel
to the speculative frenzy. "This market has no downside risk," the land
opined, as Dutchmen undoubtedly said to each other about the tulip-bulb
an earlier time.
There are reports of Palm Beach land bought for $800,000 in 1923,
resold in 1924 for $1.5 million. By the following year the same land sold
million. At the top of the boom there were 75,000 real estate agents in
of the entire population of the city. Inevitably the boom ended, as do all
crazes. By 1926 new buyers could no longer be found and prices softened.
speculators dumped their holdings on the market and a complete collapse
On the 1929 year; page 46
"Not "everybody" was speculating in the market, as was commonly assumed.
to buy stocks (buying on margin) did increase from only $ 1 billion in 1921
$9 billion in 1929. Nevertheless, only about a million persons owned
stocks on margin in 1929. Still, the speculative spirit was at least as
widespread as in the previous
crazes and was certainly unrivalled in its intensity. More important,
speculation was central to the culture. John Brooks, in "Once in
Golconda," (Golconda was an ancient Indian city where, it is said, anybody
who passed through its gates
became wealthy - Ed) recounted the remarks of a British correspondent newly
in New York: You could talk about Prohibition, or Hemingway, or air
or music, or horses, but in the end you had to talk about the stock market,
and that was
when the conversation became serious."
On the 'tronics' mania; page 57
"Promoters, eager to satisfy the insatiable thirst of investors for the
stocks of the Soaring Sixties, created new offerings by the dozens. More
were offered in the 1959 - 62 period than at any previous time in history.
mania rivalled the South Sea Bubble in its intensity and also, regrettably,
fraudulent practices that were revealed.
It was called the "tronics boom", since the stock offerings often included
version of the word "electronics" in their title even if the companies had
to do with the electronics industry. Buyers of these issues didn't really
the companies made - so long as it sounded electronic, with a suggestion of
For example, American Music Guild, whose business consisted entirely of
- to - door sale of phonograph records and players, changed its name to
Space - Tone
before "going public". The shares were sold to the public at $2 and
within a few
weeks rose to $14.
The name was the game. There were a host of "trons" such as Astron,
and Transitron, and a number of "onics" such a Circuitronics, Supertronics,
and several Electrosonics companies. Leaving nothing to chance, one group
put together the winning combination Powertron Ultrasonics.
Jack Dreyfus, of Dreyfus and Company, commented on the mania as follows:
"Take a nice little company that's been making shoelaces for 40 years and
a respectable six times earnings ratio. Change the name from Shoelaces
Inc. to Electronics
and Silicon Furth - Burners. In today's market, the words "electronics"
and "silicon" are worth 15 times earnings. However, the real play comes
from the word "furth-burners",
which no one understands. A word that no one understands entitles you to
your entire score. Therefore, we have six times earnings for the shoelace
business and 15 times earnings for electronic and silicon, or a total of 21
Multiply this by two for furth-burners and we now have a score of 42 times
for the new company."
In a later investigation of the new-issue phenomenon, the Securities and
Commission uncovered considerable evidence of fraudul and market
example, some investment bankers, especially those who under-wrote the
issues, would often hold a substantial volume of securities off the market. This made the
market so " thin" at the start that the price would rise quickly in the
In one "hot issue" that almost doubled in price on the first day of
SEC found that a considerable portion of the entire offering was sold to
many of whom held on to their allotments for a period until the shares
could be sold
at much higher prices. The SEC also found that many underwriters allocated
portions of hot issues to insiders of the firms such as partners,
and other securities dealers to whom a favour was owed. In one instance,
of a new issue was allocated to "insiders", rather than to the general
(Incidentally, in the late 1960's, the US market would close every
Wednesday, to allow
time to catch up with the backlog of paper work.)
The bio's; page 79
"What electronics was to the 1960's, biotechnology became to the 1980's.
promised to produce a group of products whose uses ranged from the
treatment of cancer
to the growing of food that would be hardier and more nutritious because it
had been genetically modified. In its cover story "Biotech Comes of Age"
1984, Business Week put its imprimatur on the boom. 'The fundamental
Is the technology real? - has been settled,' the magazine reported. The
revolution was likened to that of the computer. The magazine reported that
'has out-distanced the most optimistic forecasts' and projected dramatic
in the sales of biotechnology products.
Such optimism was also reflected in the prices of biotech company stocks.
the most substantial company in the industry, came to market in 1980.
first twenty minutes of trading, the stock almost tripled in value, as
anticipated that they were purchasing the next IBM at its initial public
new issues of biotech companies were eagerly gobbled up by hungry
saw a chance to get into a multibillion-dollar new industry on the ground
The key product that drove the first wave of the biotech frenzy was
Interferon, a cancer-fighting
drug. Analysts predicted that sales of Interferon would exceed $1 billion
(In reality, sales of this successful product were barely $200 million in
but there was no holding back the dreams of castles in the air.) Analysts
predicted an explosion of earnings two years out for the biotech
were continuously disappointed. But the technological revolution was real
springs eternal. Even weak companies benefited under the umbrella of the
Valuation levels of biotechnology stocks reached levels previously unknown
even during the most pathological phase of the growth-stock boom of the
Speculative growth stocks might have sold at 50 times earnings in the
1960s. In the
1980s, some biotech stocks actually sold at 50 times sales."