One of the most famous truisms about investing comes care of Jesse Livermore, the renowned securities analyst who said that there is nothing new on Wall Street: “There can’t be, because speculation is as old as the hills.”
The history of finance is filled with frenzies, frauds and flops. And euphoric investors tend to wind up with a bucket of cold water in the face. How much do you know about market manias? Here’s a quiz to test your knowledge.
1. What is often considered one of history’s first speculative bubbles occurred more than 350 years ago, and revolved around this unexpected item.
A. French Champagne
B. Indian saffron
C. Chinese jewelry
D. Dutch tulips
ANSWER: D. Tulip Mania transfixed the public in the 1630s, when formal futures markets introduced the ability to trade contracts based around tulip bulbs, sending prices sky-high before plunging. It is estimated that at the peak of the frenzy, a bulb was worth as much as 10 times the average annual salary of a skilled worker.
2. While many manias sent obvious warning signals in hindsight, some of history’s greatest minds have gotten swept up in them. The South Sea bubble brought financial ruin to this famous scientist.
A. Isaac Newton
B. Galileo Galilei
C. Nicolaus Copernicus
D. Charles Darwin
ANSWER: A. Newton was one of many investors dazzled by South Sea Co. shares, which jumped nearly 10-fold between January and June of 1711, only to plummet more than 80% between June and September—about as good a proof of gravity as an apple falling from a tree.According to the Smithsonian, Newton sold his stake after doubling his money, but reinvested as the stock kept rising, only to be wiped out in the collapse. Afterward, he is said to have mused, “I can calculate the motions of heavenly bodies, but not the madness of people.”
3. Many manias arise from new technologies, as investors bet that fast growth and adoption will be enough to justify out-of-control valuations. In the U.K. in the 1840s, the introduction of this technology became a bubble.
A. Electric motors
ANSWER: B. The widespread introduction of railways spurred development throughout the U.K., particularly after improvements in steam-engine designs made trains more efficient. Shares of rail companies surged in euphoric investing. The trades reached the end of the line, however, when the Bank of England raised interest rates and it was realized that many rail plans weren’t as feasible as originally expected.
4. The most famous ending to a speculative frenzy was the October 1929 stock-market crash, the start of the Great Depression. How much in market value was erased on Black Tuesday, Oct. 29?
A. $6 billion
B. $14 billion
C. $29 billion
D. $50 billion
ANSWER: B. The Dow Jones Industrial Average fell 12% on Black Tuesday, a decline of 30.57 points, after a 13% drop the day before. The day’s selling was so heavy that some 16 million shares exchanged hands, a record that would stand for nearly 40 years.
5. Another market crash, 1987’s Black Monday, stands as the largest one-day percentage decline for the Dow and S&P 500 on record. While it didn’t lead to a depression, it did hasten the introduction of this investing tool.
A. Limit orders
B. Premarket and postmarket trading
C. Exchange-traded funds
D. Currency-hedged products
ANSWER: C. ETFs, now a global industry with about $5 trillion in assets, were partially inspired by the 1987 crash. In the aftermath, the Securities and Exchange Commission realized there had been no single security representing the broad market trading during the decline; had one existed, they argued, it could have added liquidity to the market and helped stanch the losses. The first ETF, tracking the S&P 500, would debut in 1993.
6. Collectible items sometimes become manias, as buyers hope that the latest consumer fad becomes the next rare baseball card. The 1990s had a particularly childish version of this cycle, with the short-lived popularity of this toy.
A. Beanie Babies
B. Tickle Me Elmo
ANSWER: A. Collectors of these small stuffed animals bought them as investments rather than playthings for children, and some predicted that rare ones would see their value increase by 8,000% over the subsequent decade. Today, they have basically no resale value at all.
7. For many modern investors, “market mania” may be most associated with the bubble in internet stocks nearly 20 years ago. While the losses were widespread when it “popped,” one online retailer in particular has remained the go-to example for the era’s excesses. What did it sell?
A. Luxury watches
B. Audio equipment
C. Pet supplies
D. Gardening equipment
ANSWER: C. Pets.com was one of the most high-profile early internet startups. Its sock-puppet mascot became a Thanksgiving Day parade float. The company didn’t stay afloat for long, however, as it went from its IPO to liquidation within a year, wiping out some $300 million in value.
8. During the dot-com era, then-Federal Reserve Chairman Alan Greenspan memorably used this phrase to describe the investing environment.
A. Over-caffeinated markets
B. Jaw-dropping euphoria
C. Ecstatic equities
D. Irrational exuberance
ANSWER: D. Mr. Greenspan made the comments in a December 1996 speech, speaking in response to a period of strong market gains. While the idea was prescient, as dot-com-era stocks were in a bubble, it was also early. Markets wouldn’t top for another three years, but the losses after that would be swift and steep.
9. Bitcoin and other cryptocurrency-related investments have been widely cited as a modern mania, with price swings and investments that have garnered millions of dollars despite few clear use cases. A common term in the crypto universe is ICO. What does it stand for?
A. Immediate call overlay
B. Initial coin offering
C. Infinite crypto optimization
D. International cash opportunity
ANSWER: B. ICOs essentially function as a kind of crowdfunded initial public offering. According to a Wall Street Journal analysis published in July, nearly $12 billion was raised through ICOs in the first five months of 2018. An earlier Wall Street Journal analysis published in May showed hundreds of such offerings bear the hallmarks of fraud or other red flags.
10. The 1950s and 1960s, a strong period for the U.S. economy, weren’t immune from bubbles and manias. One crash involved this popular pastime.
A. Drive-in theaters
B. Hula Hoops
D. Television broadcasts
ANSWER: C. A bowling bubble arose as the sport gained popularity, with one stock— Brunswick Corp. —climbing nearly 1,600% between 1957 and 1961. According to Charles Schwab, industry analysts at the time expected every American to spend an average of two hours bowling every week.
Mr. Vlastelica is a markets reporter at MarketWatch in New York. Email him at [email protected]