Business Math in Action

Chapter 12: Investments

Tulips Too Good to Be True

Investing in stocks always involves some risk, so it makes sense to research a company before you buy shares of its stock. Invest prudently, and you should see a decent return on your investment. Some people, however, view the stock market as a kind of lottery—if only you could figure out what the next Starbucks, Google, or Microsoft was going to be, you could buy the stock and strike it rich. When a lot of people decide that a certain company is the next big thing, the price of that stock can go up so high that it is hard to tell how much the company is actually worth. This effect is called a bubble. Unfortunately, what goes up usually comes down, leaving a lot of investors broke. This is called a crash. While Starbucks, Microsoft, and other legendary companies did make early stockholders very wealthy, those instances are rare.

The most dramatic stock bubble of all time took place more than three centuries ago and involved a simple flower. In 1593, tulips were first brought to Holland from Turkey. They soon became very popular collector's items among the upper classes. At that point tulips were pricey, but no more so than other fads enjoyed by the rich. After a few years, tulips that were cultivated by the Dutch contracted a virus that caused their petals to "flame," or turn multicolored. The flames made tulips even more expensive, depending on the rarity of the colors.

In 1634, tulip prices began to soar to unreasonable heights. The Dutch were convinced that other Europeans would love tulips as much as they did, and that the price of the flowers would never decline. In fact, there was a wave of "tulipmania" in England and France, but it never reached the level it did in Holland, where much of the population, even the poor, neglected traditional industries and investments and got caught up in the tulip trade.

In 1637 a few smart, upper-class investors figured that the price of tulips could not rise forever. Understanding how markets rise and fall, they decided to hold on to their money and stop buying and selling tulips. Prices began to fall immediately, and panic struck. People who had agreed to buy bulbs at a particular price now decided to hold on to their money. The Dutch courts refused to get involved, stating that bulb-trading was nothing more than gambling. People who sold their bulbs at the beginning of the crash managed to recover their assets, but those who moved too slowly were ruined. The nation as a whole suffered because so many citizens lost not only their savings but also their homes and businesses.

The Dutch never forgot the lessons of tulipmania, yet their love for tulips was clearly genuine. Today, tulip production contributes more than $750 million to the Dutch economy each year, and over nine billion tulip bulbs are produced annually—seven billion of them exported to other countries.

English Language Arts/Writing

Buying Stock

Imagine you have $2,000 in a savings account. A friend advises you to use the money to buy stock in a hot new computer company, saying that they make a product that is going to be a huge seller in the near future. Write a short paragraph explaining whether you would buy the stock or invest more cautiously.