South Sea Stock Price Bubble Is Good Reminder, Even 300 Years Later
The comments below are an edited and abridged synopsis of an article by Tim Shaler
Three hundred years ago, the South Sea stock price bubble popped, and almost destroyed the United Kingdom.
There have been many instances of amazing speculation leading to spectacular price inflation, only to have all that speculation proved wrong, and that highly inflated asset bubble suddenly pops.
That’s why investors should ask whether an asset price really makes sense, given the long-term prospects of the company’s profits.
Some investments do make sense; one share of IBM 50 years ago would have cost $6.51; it’s now trading at +/-$119 per share. That equates to a 50-year compound annual growth rate of 6%. But many other investments have not gone as well (the US stock market crash of 1929; the frenzy in the housing market from 2004 to 2006).
More trouble occurred when banks could no longer lend to various countries because banks were encountering such bad losses on loan portfolios tied to the US mortgage borrowers. Countries that experienced massive recessions in the years after the 2006 US housing bubble popped included Iceland, Ireland, Portugal, Spain, Greece and Cyprus.
Before then, the US property market had never gone down in value since the deflationary years of the Great Depression of the 1930s, even as challenges affected some regional markets. And with a strong economy and immigration still positive, it seemed to many that US property values could not go down.
It took 85 years for global investors to forget the lessons of the 1930s and think the US property market couldn’t fall in value. Obviously, the lessons of 2008–2009 proved otherwise.
Investors should ask themselves whether the investments they are making are at values justified by future profits and not just by the hope of selling to some future, greater fool.