Do you love a good scary yarn? Are you a horror flick aficionado? Does the thought of the zombie apocalypse fill you with terror?
Bah! We’ve got some real tales from the finance crypt that will give even the bravest investor cold sweats and fits of analysis paralysis! Read on if you dare…
Terrifying tulip mania
Back in the Dutch Golden Age in the early 17th century, Holland was swept with the hottest financial craze to hit Europe since Benedikt Kotruljević (or Luca Pacioli depending on your perspective) wrote about double entry bookkeeping – the tulip.
Imported from Turkey, these pretty flowers were in great demand and were the “in” thing to have. People offered property, gold, jewels and went into major debt…all to buy tulips. In a few months the price of tulips multiplied by a factor of 20 before crashing to earth faster than that spooky alien ship from The Thing.
Although debated by modern economists if this was truly an economic nightmare, the craze is often held as classic example of a “bubble” caused by an asset class deviating from its intrinsic value.
For another classic tale of terror, check out the original The Exorcist – one of the greatest horror movies of all time.
The dot-com apocalypse
Fast forward a few centuries, and you can still hear echoes of the screams of those who lost so much in the tech bubble of the 90s.
With the ubiquitousness of the modern Internet we’ve forgotten that back in the late 20th century this monolith was more of a black hole of incredible promise that triggered investing hysteria. Everything was being promised online – groceries, true love…even pets – remember pets.com? Hundreds of new Internet companies were valued in the billions as they hit the Nasdaq Composite, sending the market skyrocketing within the span of five years.
But when the clock struck in the 21st century, all the magic fizzled out. In less than two years the NASDAQ dropped by 78% (ouch) from its peak and the entire US economy was plunged into recession.
Incidentally, the next few years of the early 21st century recession spawned a number of great zombie flicks including 28 Days Later.
The US housing market horror show
But the exploding bubble we remember the most is the one that triggered the GFC of just under a decade ago.
We all know the story – US house prices almost doubled in the decade until 2006, but beneath the surface it was being powered by mortgage fraud and unsustainable sub-prime borrowing. By 2009, the average US home was down 20% in value (remember this is an average – some states saw much steeper declines) and the ripple effect was felt across the world as a global recession.
Fallout from the sub-prime mortgage was the least of this family’s problems when they moved into a haunted house in The Conjuring.
The Bernie Madoff money massacre
In 2009, American financier Bernard Madoff was sentenced to 150 years in prison for running the largest Ponzi scheme in history. Over the course of several decades, he cheated thousands of investors out of an estimated $65 billion on paper. Madoff bankrupted many families and turned their retirement dreams into a nightmare.
The scam worked like this: every day his flunkies picked the best-performing stocks and used them to create phoney stock portfolios. Madoff would decide on a return for a customer and then have one of his cronies create a false trading report with enough time between starting and closing dates to produce the requested profits. His staff used a computer program to backdate trades and manipulate account statements so it all appeared legitimate. Madoff claimed these high returns were generated by his custom strategy and expertise when of course the entire thing was a massive con job. Madoff used the classic Ponzi scheme of paying off old investors with the money from new investors while pocketing some of the cash himself.
How did he pull this off for so long? First, he was very well-connected in the financial world. In fact, he actually helped launch the Nasdaq stock market and – even more alarming – he advised the Securities and Exchange Commission on trading securities (the same organisation that later indicated him)! The other reason is that he frequently told his clients not to highlight their relationship with him – precisely because he knew that if too many people found out the entire thing would collapse. Which is exactly what happened when clients demanded he cough up the $7 billion in returns he promised them.
Now how can we have the word “massacre” in this post and not mention The Texas Chainsaw Massacre? Whether you watch the 1974 original or the decent 2003 remake, you’ll get a chill walking down the lawn care aisle at your local hardware store.
Bonus: for a horror movie that’s a bit of a con job (a comedy disguised as a horror movie) check out the excellent The Cabin in the Woods. It stars a pre-Thor Chris Hemsworth as part of a group of friends who get more than they bargained for at a summer getaway.
A match made in hell – celebrities and bad investing
Celebrities and bad money decisions go together like Vegemite and toast. The Internet is littered with stories of bankruptcies, thefts and terrible investments – NBA Hall of Famer Scottie Pippen once spent $4.3M on a private jet only to discover it needed another $1M in repairs just so it could take off. Kanye West blew $53M funding his clothing line. Johnny Depp spent $20K a month on wine.
We were surprised to learn that Nicolas Cage, once among the most bankable stars in Hollywood, is nowhere near as rich as we thought. He burned up a $150M fortune in a decade, and it wasn’t just his spending on dinosaur skulls and private jets that did it. Cage had two Fifth Avenue apartments, a Hollywood mansion, three castles, and no less than TWO Bahamas islands. When the housing market collapsed, he had to sell up and lost a massive amount of money.
Speaking of Nicholas Cage, he starred in one of the WORST horror movie remakes ever – 2006’s The Wicker Man. If you want to see a GREAT horror movie then check out the 1973 original starring the famous Sir Christopher Lee.
Warren Buffett’s macabre investment choices
Let’s finish with Warren Buffett, one of the richest men on earth and perhaps the most famous investor ever.
The 88-year-old has done pretty well for himself but he’s also made his share of mistakes. Not selling his 2012 stock in UK supermarket giant Tesco quickly enough cost his company Berkshire Hathaway $444 million. In 1993 he spent $433 million to buy Dexter Shoe Co. and funded the purchase using shares from Berkshire Hathaway. In a 2007 letter to shareholders Buffett estimated that blunder cost investors $3.5 billion.
Perhaps most surprisingly is his statement that the worst stock he ever purchased was Berkshire Hathaway in 1962, when it was a failing textile company. After a personal feud with the manager, Warren bought the rest of the company out of spite. He stubbornly poured money to keep it afloat for the next 20 years. It was a financial horror show that he estimates cost him $200 billion!
Speaking of blunders, most of the plot for Wolf Creek occurs because the protagonist shoots the psychopath in the neck with his own rifle…then leaves it next to him and walks away! In hindsight this was a terrible idea – like using Berkshire Hathaway stock to buy a shoe company. But hey, if not for bad decisions then we wouldn’t have horror movies and cautionary tales of investing.
If you want to avoid your own financial tale of woe, then check out Clover. We remove all the scariness to make investing in your future affordable and hassle-free.
Not a Clover customer? Get your free customised investment plan. 🍀
Already a customer? Refer a friend and get $5,000 in assets managed for free for life! 🍀