I’m going to share two real-life stories, one about cryptocurrencies in the 21st century and the other on the economic history of Dutch tulips in the 1600s.

Although these stories are literally hundreds of years apart and are quite dissimilar, they have a similar financial moral that I think is useful for us to revisit.

These are the two stories.

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Crypto Crash

Back in early 2021, a Japanese friend of mine was arguing with her Singaporean husband over whether to put her money into cryptocurrencies, like bitcoin and ether.

This whole thing actually started with her cousin back in Japan. The young man had made a lot of easy money, literally hand over fist.

As such, my Japanese friend was totally convinced that she wanted a piece of the crypto action.

Her long-suffering husband, who mind you, was in the investment banking business and who really knew what he was talking about, spent much energy and effort explaining to her that with prices skyrocketing in 2020 and 2021, all the sound and fury indicated a likely bubble, and bubbles eventually pop, so she should really be more careful.

He wanted to take a more conservative, careful approach, in contrast to her very positive, optimistic outlook.

Fortunately, through incredible luck or eloquent persuasion, her husband managed to stop her from putting her hard-earned money into what (quite literally) turned out to be the peak of the market.

He had saved her in the nick of time, because Bitcoin and ether came crashing down shortly after, towards the end of 2021.

The husband-and-wife duo have not spoken about cryptocurrencies since then.

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The Dutch Tulip Craze

To be honest, bubbles are nothing new in economic history: rising property prices in the United States during the sub-prime mortgage crisis, the dotcom bubble, and many other instances immediately come to mind.

But to my mind, the most famous example of a bubble comes from Holland in the 17th century.

Known as ‘tulipmania’, the Dutch tulip bulb bubble occurred during the early to mid-1600s when speculation drove prices up dramatically. People began buying tulips with borrowed money, sometimes buying more than they could afford. Professional traders jumped into action.

However, just as quickly as the craze began, prices began to fall in 1637 and confidence was soon dashed. That led to prices tumbling even further.

To be fair, some economists cast doubt on whether tulipmania constituted a “real bubble”, because production lags and the way tulip contracts were worded meant that increases in demand could have rationally and logically led to rising prices.

That’s alright. Economic history is not cast in stone. There’s no fixed answer.

However, the broader lesson is quite clear.

To borrow the wise words of the oracle of Omaha, Warren Buffett, in his Chairman’s letter from 1986:

What we do know… is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

What this means is that when my Japanese friend was observing everyone she knew becoming rich from rising bitcoin and ether prices, and even her useless relative had become an overnight millionaire, it was precisely the time when she should have turned fearful.

She was lucky that her husband understood this principle, and managed to steer her away from potentially losing her hard-earned money if she had bought and panicked to exit when the crash came, or at the least, having a paper loss for a very long and undetermined period of time.

To conclude, the broad lessons of economic history — if understood and learnt correctly — can serve as a useful guide and reminder to us.

We might do well to remember them. They will save us from making terrible financial decisions.

Stay safe on your journey towards financial freedom.

(Adapted from an online article I wrote in August 2021.)