Forex For Beginners Blog

We have talked about cycles and how they repeat themselves. There have been many examples of booms/busts throughout history and there will be many more.

One of the most famous events was the “South Sea Bubble” which occured in 1720. Quoting from its entry in wikipedia

“The South Sea Company was a British joint stock company that traded in South America during the 18th century. Founded in 1711, the company was granted a monopoly to trade in Spain’s South American colonies as part of a treaty during the War of Spanish Succession. In return, the company assumed the national debt England had incurred during the war. Speculation in the company’s stock led to a great economic bubble known as the South Sea Bubble in 1720, which caused financial ruin for many.”

(Source: South Sea Bubble)

A classic early example of greed overcoming fear, and supposedly intelligent people wildly speculating on the markets. The company was also infamous for being heavily involved in the “Slave Trade”.

The level of speculation almost makes the current crisis seem tame.

“The price of the stock went up over the course of a single year from about one hundred pounds a share to almost one thousand pounds per share. Its success caused a country-wide frenzy as all types of people – from peasants to lords – developed a feverish interest in investing; in South Seas primarily, but in stocks generally. Among the many companies to go public in 1720 is – famously – one that advertised itself as “a company for carrying out an undertaking of great advantage, but nobody to know what it is”.[2]

The price finally reached £1,000 in early August and the level of selling was such that the price started to fall, dropping back to one hundred pounds per share before the year was out, triggering bankruptcies amongst those who had bought on credit, and increasing selling, even short selling – selling borrowed shares in the hope of buying them back at a profit if the price falls.”

(Source: South Sea Bubble)

Once again our primal drivers kick in; greed and fear. In one year the stock rose nearly 1000% and then crashed back even more quickly:

NB: markets generally come down a lot more quickly than they go up, showing that fear is more powerful than greed. This must be remembered in a down market!

Here’s a great video from those geniuses of comedy “John Bird and John Fortune” that illustrates the point well.

Remember: We always forget the bad times and greed will always come back. As traders we can take advantage of this as long as we understand what is going on. You can piggyback on the back of this madness and make huge profits.

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