Tulips, Bubbles And Other Great Scams

Sydney Morning Herald

Friday October 24, 1997

PAUL CLITHERDE Paul Clitheroe is a director of IPAC Securitiesand hosts Channel Nine's Money program.

The elusive search for quick wealth has led us down the garden path so often you have to wonder why we haven't given up altogether.

We fall for a whole range of scams, some so ingenious that even hardened investors are taken in. But fortunately the great majority of scams can be easily detected by the simple "if it sounds too good to be true, it is" test.

Scams come in many forms. One of the more impressive was put together by an enterprising gentleman who purchased a mailing list of 10,000 high income individuals. He produced two newsletters, one stating a certain volatile stock would rise, the other predicting the same stock would fall.

He mailed 5,000 people with his "rise" predictions; the other 5,000 his "fall" predictions. He then waited to see what happened and repeated the process with another tip, but this was only sent to the 5,000 who had received the correct initial tip. A process of elimination and three different tips meant that eventually 1,250 people had received three accurate predictions.

He then mailed out a dual proposal to the 1,250 people. After pointing out his proven accuracy, he offered to sell them a monthly newsletter for $1,000 per annum ($3,000 for 5 years), plus the opportunity to join his investment syndicate for a minimum contribution of $50,000.

No one knows how much he got away with, because many who handed over their money are too embarrassed to admit to being conned. But it is rumoured that he is living very well in Europe.

Less damaging because of the smaller amounts of money involved are the pyramid schemes. Some of these take off in a big way. Pyramid schemes offering huge returns to investors caused a financial crisis recently in Albania.

In Australia, Joker 88 was the most well supported in recent times, delivering its originators hundreds of thousands of dollars. Those who jumped in early also made money, but leaving thousands of late entrants out of pocket.

We ran a story on the Money television program on Joker 88 earlier this year. It's conclusions were pretty obvious. Joker 88 and similar pyramid schemes are a scam. For each of the Australian hopefuls who put $150 into the scheme, to receive the $109,000 promised, we estimated that another 540 million people had to sign up.

And if those 540 million were to make $109,000 out of their $150 investment? Unfortunately at this stage our financial calculator just didn't have a display board big enough to give us the answer. But clearly it was well in excess of the entire human population now or in about 500 years.

This was no surprise to me. But what did surprise me was dozens of letters from outraged Joker 88 participants who in summary seemed to think that it was a godsend to the average Australian battlers.

If Joker 88 was a godsend, then presumably some more notorious personal finance companies impoverishing Australians with 26 to 29 per cent loans are a group of angels. But that's another story for another column.

As we learn to live in this era of information, and our knowledge about money improves, you'd hope that we would be less likely to be conned. But I doubt it.

Hope springs eternal with humans and we may win lotto next week.

And given that we have been chasing scams and schemes for thousands of years, a little knowledge is not likely to stop us. Mass hysteria has swept most nations in the past, and will do so in the decades to come.

One of the classic speculative panics involved the humble tulip bulb. In the mid 16th century tulips from Constantinople hit Europe. Holland was the home of what rapidly became symbols of good taste.

After 80 years of gentle prosperity, tulip bulbs became a fad, with people speculating on the likely trendy colour for the next season. Every man woman and dog jumped into the market.

Sure enough, call options based on a 20 per cent deposit were introduced and between 1634 and 1638 people abandoned cash and property to acquire tulip bulbs.

Prices got pretty hot and Charles Mackay reports in his 1850's book, aptly titled Extraordinary Popular Delusions (Vol 1), that a Harlarem species bulb was swapped for 12 acres of prime building land. A Viceroy was sold for 17 bushels of wheat, 4 fat oxen, 8 fat swain, 12 fat sheep, 2 hogshead of wine, 4 tons of beer, 2 tons of butter, 1,000 pounds of cheese, a complete bed, plus a silver drinking cup.

Don't ask me what that lot is worth, but it's a pretty expensive tulip bulb. Personally I would have off loaded it just for the 4 tons of beer.

To even the most ardent tulip bulb owner, this was a bit silly. So the great sell off began. True to the traditions of commonsense in politics, government ministers of the day stated officially that there was no reason for tulip bulbs to fall in price.

In a way they were right. Prices didn't fall. They collapsed and the shock waves caused a prolonged depression in Holland.

Another wonderful example of speculative madness was the South Sea Bubble. In the UK in 1711, the South Sea company took over a 10 million pound government IOU and in return was granted a monopoly over trade in the South Seas.

The public was impressed. And even more so in 1719 when the company directors offered to fund the entire national debt. In 1720 a Bill was introduced to that effect and the company's share price went from 130 pounds to 300 pounds.

The directors issued new shares at 400 pounds. By June 1720 they hit 890 pounds and soon after 1,000 pounds.

A wonderful range of new companies hit the market to soak up the punters' money. These included companies which were going to turn salt water into fresh water, turn lead into silver, one with a perpetual motion wheel and a company to import jackasses from Spain.

My prize, however, goes to the promoter of the company called "A Company for Carrying On and Undertaking Business of Great Advantage, But Nobody Knows What It Is".

In the true tradition of a frenzied market, the promoters departed post haste for Europe.

The "bubble" companies numbered more than 100. But the bubble burst when, in another great tradition, the directors of the South Sea Company smelt the end and flogged their own shares. The price plummeted and the bubble burst.

The Parliamentary History of England summarises the sad saga very well: It was "seen in the space of eight months, the rise, progress, and fall of that mighty fabric, which being wound up by mysterious springs to a wonderful height, had fixed the eyes and expectation of all Europe, but whose foundation being fraud, illusion, credulity and infatuation, fell to the ground as soon as the artful management of its directors was discovered."

It's a lesson worth remembering.

© 1997 Sydney Morning Herald

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