Many novice investors ask, “What does a stock market top look like?”
There are numerous historical examples to look back upon. Here is one.

“Money, again, has often been a cause of the delusion of
multitudes. Sober nations have all at once become desperate
gamblers, and risked almost their existence upon the turn of a
piece of paper … Men, it has been well said, think in herds; it
will be seen that they go mad in herds, while they only recover
their senses slowly, and one by one.”[1]

The fascinating book “Extraordinary Popular Delusions and the Madness of
Crowds” (originally titled, “The Madness of Krauts”) documents the universal
behavior of people swept up in the investment schemes of their day. To
many, “Tulipomania” and the Holland of 1559 may seem far removed from the mutual
funds, stocks, and options of today. This is because we tend to forget
that the numbers printed on those brokerage and mutual fund statements
(balances) don’t actually represent money — just the current valuation of paper held
in trust for us. In the end, their value is only how many dollars someone
else will pay for them at any given moment. That can change quickly.

The first tulip bulbs were sent to a gentleman in Holland from a friend
living in Constantinople:

“In the course of 10 or 11 years after this period, tulips
were much sought after by the wealthy… Rich people at Amsterdam
sent for the bulbs direct to Constantinople, and paid the most
extravagant prices for them….The rage for possessing them soon
caught the middle classes of society, and merchants and
shopkeepers, even of moderate means, began to vie with each other
in the rarity of these flowers and the preposterous prices they
paid for them.”[2]

Within our lifetimes, stocks have been a vehicle for those with substantial
sums of money to invest. In 1929 (during a previous mania), economist Al
Sindlinger estimates that 10 percent of American households were invested
in the stock market. Today that figure is 43 percent. That figure will never
approach 100 percent; not everyone has excess funds to invest.[3]

In 1634, the rage among the Dutch to possess them [tulips] was so
great that the ordinary industry of the country was neglected, and the
population, even to its lowest dregs, embarked in the tulip trade. As
the mania increased, prices augmented….So anxious were the
speculators to obtain them, that one person offered the fee-simple of
twelve acres of building-ground for the Harlaem tulip.”[4]

This is another characteristic of manias: people are willing to trade
real assets in return for speculative investments.

“The demand for tulips of a rare species increased so much in the
year 1636, that regular marts for their sale were established on
the Stock Exchange of Amsterdam, in Rotterdam, Harlaem, Leyden,
Alkmar, Hoorn, and other towns. Symptoms of gambling now became,
for the first time, apparent. … Many individuals suddenly grew
rich. … Everyone imagined that the passion for tulips would last
for ever, and that the wealthy from every part of the world would
send to Holland, and pay whatever prices were asked for
them….People of all grades converted their property into cash,
and invested it in flowers. Houses and lands were offered for sale
at ruinously low prices, or assigned in payment of bargains made at
the tulip-mart. Foreigners became smitten with the same frenzy, and
money poured into Holland from all directions. …

As the mania grows, more and more people are drawn into it. The wealthy,
who bought early and cheap, watch their investment soar. Latecomers,
who can ill afford to lose, sell whatever they have to participate.
They assume that things will always remain the same. As public
participation increases, regulatory agencies join in to “protect the

The operations of the trade became so extensive and so intricate,
that it was found necessary to draw up a code of laws for the
guidance of the dealers. … At last, however, the more prudent
began to see that this folly could not last for ever. Rich people
no longer bought the flowers to keep them in their gardens, but to
sell them again at cent per cent profit. It was seen that somebody
must lose fearfully in the end. As this conviction spread, prices
fell, and never rose again. … Defaulters were announced day after
day. … Hundreds who, a few months previously, had begun to doubt
that there was such a thing as poverty in the land suddenly found
themselves the possessors of a few bulbs, which nobody would buy,
even though they offered them at one quarter of the sums they had
paid for them. … Many who, for a brief season, had emerged from the
humbler walks of life, were cast back into their original
obscurity. Substantial merchants were reduced almost to beggary,
and many a representative of a noble line saw the fortunes of his
house ruined beyond redemption. …

After the mania subsides, the blame game begins:

It was generally agreed that deputies should be sent from all parts
to Amsterdam, to consult with the government upon some remedy for
the evil. … Actions for breach of contract were threatened in all
the courts of the country; but the latter refused to take
cognisance of gambling transactions. … Thus the matter rested. To
find a remedy was beyond the power of government. … the commerce of
the country suffered a severe shock, from which it was many years
ere it recovered.”[5]


Charles Mackay, LL.D., Extraordinary Popular Delusions and the Madness
Crowds (London, 1841; New York, 1980 Crown Publishers) ISBN 0-517-53919-5
Paper, 724 pages, index. Page xx, preface to 1842 edition.

Ibid., p. 89
Elliott Wave Theorist, 27/Mar/97, p.6.
Mackay, p.90
Ibid.,pp. 90-97

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