Bubble Watch, Part 5: Milkmaids and philosophers — “Democratizing finance” through the ages

According to legend, in 1929 Joseph P. Kennedy realized that it was time to sell when he received a stock tip from a shoeshine boy. Okay, when shoeshine boys are playing the market, you sell. But what if you can’t find a shoeshine boy? Who else might serve as a useful contrarian indicator? Here, I present a handy guide to other groups who have historically entered at the peak of a bubble.

Holland, 1636

Here’s the classic account of the tulip bubble from Mackay (1841):

Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and one after the other, they rushed to the tulip-marts, like flies around a honey-pot … Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney-sweeps and old clotheswomen, dabbled in tulips.

France, 1719

The scene in Paris during John Law’s Mississippi Bubble was described by Bourne (1871):

… and the people of France, from peer to peasant, rushed madly into the tempting maze of speculation prepared for them … Law's house in the Rue de Quincampoix was besieged from morning to night by a rabble of dukes, duchesses, merchants, milkmaids, and all other representatives of noblesse and bourgeoisie.

Britain, 1720

Here’s the famous passage from Bagehot (1856) about the South Sea Bubble:

Much has been written on panics and manias—much more than with the most outstretched intellect we are able to follow or conceive; but one thing is certain, that at particular times a great many stupid people have a great deal of stupid money … quiet ladies, rural clergymen, and country misers … rectors, authors, grandmothers, who have no knowledge of business … At intervals, from causes which are not to the present purpose, the money of these people—the blind capital (as we call it) of the country—is particularly large and craving; it seeks for some one to devour it, and there is “plethora”—it finds some one, and there is “speculation”—it is devoured, and there is “panic” …

A 1720 poem by Edward Ward described another set of South Sea Bubble buyers:

Young Harlots too, from Drury-Lane,
Approach the 'Change in Coaches,
To fool away the Gold they gain
By their obscene Debauches.

United States, 1791

Miller (2018) quoted this eyewitness account of the “Scriptomania” from Dr. Benjamin Rush:

Merchants, grocers, shop keepers, clerks, prentice boys, and even a sea captain, all forsook their usual employments to speculate in Script.

Britain, 1825

Bourne (1871) gave this summary of the Joint-Stock Company Mania of 1825:

All the gambling propensities of human nature were brought into action, and crowds of individuals of every description … princes, nobles, politicians, placemen, patriots, lawyers, physicians, divines, philosophers, poets - intermingled with women of all ranks and degrees, spinsters, wives, and widows, hastening to venture some portion of their property in schemes of which scarcely anything was known except the name.

Britain, 1845

Sir Henry Cole invented the Christmas card and also wrote this description of the British Railway Mania, as quoted in Odlyzko (2010):

In this year, 1845, England was visited with one of its periodical epidemics of commercial folly, the Railway Mania as it was called, which rivalled in intensity the South Sea Bubble of 1720. Peers, peeresses, commoners, merchants, tradesmen, domestic servants, operatives, were all involved in the madness, and the ruin entailed by it.

United States, 1929

Here’s an account published in April 1929 from Barnard (1929):

… aggressive, guttural dowagers, gum chewing blondes, shrinking spinsters who look as if they belonged in a missionary-society meeting, watch, pencil in hand, from the opening of the market till the belated ticker drones its last in the middle of the afternoon … waitresses and telephone girls, cooks and washerwomen … They have been swept along by some of the same urges that have carried shopkeepers and day laborers, clerks and farm hands …

Baruch (1957) provided this retrospective view:

When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich it is time to remind yourself that there is no more dangerous illusion than the belief that one can get something for nothing.

United States, 1998

Bissonnette (2015) recounted the Beanie Baby saga:

The first buyers had been children with allowances. Then their moms had started collecting. By the time of the 1998 Ty Christmas party, Van Guilder remembers, it was mostly “creepy, belligerent men” she saw lined up when she dropped in to check on retailers … More than any other consumer good in history, Beanie Babies were carried to the height of success by a collective dream that their values would always rise.

United States, 2000

With the rise of online trading in the 1990s, “democratizing finance” caught on, as described in April 2000:[1]

"Farmers and schoolteachers and plumbers are taking responsibility for their own investments," says John Yost, whose San Francisco firm, Black Rocket, created the famous TV commercial for Discover Brokerage about the tow truck driver who bought his own private island from his stock-trading profits.

China, 2007

The Chinese stock market has had several bubbles, the biggest of which peaked in October 2007. This was the situation in May 2007:[2]

But at trading halls in Chinese brokerages, no one seems worried by the predictions. The stock boom has attracted a flood of new money from millions of newcomers to the market, including elderly pensioners, students, maids, security guards, Buddhist monks, taxi drivers, and even young schoolchildren. A group of 9-year-old students at a primary school in Nanjing is among the latest stock investors. Some Chinese investors are borrowing large sums of money or pawning their possessions to gain money for buying shares.

If the above groups don’t work for you, I’ve previously suggested that you might consider Korean retail investors, low IQ Finnish males, or Cheesecake Factory servers. 

Now, what do these people all have in common? Lack of financial knowledge. I call the entry of these new market participants in the stock market “The Fourth Horseman” of the bubble apocalypse, and when they’re buying, it’s a sign that the market is overvalued.

Lastly, a bit of advice. If you are a duchess, a grocer, or a poet, may I suggest that you invest in a target date fund from a reputable asset manager? Maybe focus on being the best duchess/grocer/poet that you can be, and leave the investing to trained professionals.

Endnotes

[1] “The Dumbass, The Daytrader, and the New Democracy,” Wired, April 1, 2000.

[2] “Students, monks and maids driving China's hot market,” The Globe and Mail, May 29, 2007.

References

Bagehot, Walter. Edward Gibbon, 1856.

Barnard, Eunice Fuller. "Ladies of the Ticker." The North American Review 227, no. 4 (1929): 405-410.

Baruch, Bernard Mannes. Baruch: My own story. Holt, 1957.

Bissonnette, Zac. The great Beanie Baby bubble: mass delusion and the dark side of cute. Penguin, 2015.

Bourne, HR Fox. The romance of trade. 1871.

Mackay, Charles, Memoirs of extraordinary popular delusions and the madness of crowds. 1841.

Miller, Scott Christopher. "“Never Did I See So Universal a Frenzy”: The Panic of 1791 and the Republicanization of Philadelphia." Pennsylvania Magazine of History and Biography 142, no. 1 (2018): 7-48.

Odlyzko, Andrew. "Collective hallucinations and inefficient markets: The British Railway Mania of the 1840s." Available at SSRN 1537338 (2010).

Ward, Edward. A South-Sea Ballad, Or, Merry Remarks Upon Exchange-Alley Bubbles: To a New Tune, Call'd, The Grand Elixir, Or the Philosopher's Stone Discover'd. No. 5898. 1720.