IN HIS book, A Random Walk Down Wall Street, Burton G Malkiel tells of this event:

In 1593, a newly appointed botany professor from Vienna brought to Leyden (a city and municipality in the province of South Holland in the Netherlands) a collection of unusual plants that had originated from Turkey. The Dutch were fascinated by these new additions to the garden, but not with the professor's asking price.

One night, a thief broke into his house and stole the tulip-bulbs, which were subsequently sold at a lower price but at a greater profit. Over the next decade or so, the tulip became a popular but expensive item in Dutch gardens.

Many of these flowers succumbed to a virus known as mosaic. This virus caused the tulip petals to develop contrasting coloured stripes or flames. The Dutch valued highly these infected bulbs, called 'bizarres', and in a short time, popular taste dictated that the more bizarre a bulb, the greater the cost of owning it.

Slowly, 'tulip mania' set in. At first, bulb merchants simply tried to predict the most popular variegated style for the coming year. Then they would buy an extra-large stockpile in anticipation of a rise in price. Tulip-bulb prices began to rise wildly. The more expensive the bulbs became, the more people viewed them as smart investments. Ordinary industry was dropped in favour of speculation in tulip bulbs.

Nobles, citizens, farmers, mechanics, seamen, footmen, maid-servants - even chimney sweeps and old clotheswomen - dabbled in tulips. Everyone imagined that the passion for tulips would last forever and that buyers from all over the world would come to Holland and pay whatever prices were asked.

People who said the prices could not possibly go higher watched with chagrin as their friends and relatives made enormous profits. The temptation to join them was hard to resist - and few Dutchmen did.

In the last years of the tulip spree, which lasted from 1634 to 1637, people started to barter their personal belongings, such as land, jewellery and furniture to obtain the bulbs that would make them even wealthier. Bulb prices reached astronomic levels.

But - as happens with all speculative crazes - prices eventually got so high that some people decided they would be prudent and sell their bulbs. Soon, others followed. And like a snowball rolling downhill, bulb deflation grew at an increasingly rapid pace.

In no time at all, panic reigned. Government ministers stated officially that there was no reason for tulip bulbs to fall in price - but no one listened. Dealers went bankrupt and refused to honour their commitment to buy tulip bulbs. A government plan to settle all contracts at 10 per cent of their face value was frustrated when bulbs fell even below this mark.

And prices continued to decline. Down and down they went until most bulbs became almost worthless, selling for no more than the price of a common onion.

You may be reading this in amazement and thinking that such a thing could never happen in more modern times. Well, unfortunately, you are going to be disappointed.

From early March 1928 until early September 1929, the US stock market's percentage increase equalled that of the entire period from 1923 to early 1928. Stockmarket speculation was a national pastime. People were borrowing to buy stock that was way overpriced.

On Sept 3, 1929, the market reached a peak that was not to be surpassed for a quarter-of-a-century, even though business activity and sentiment had fallen months before. On Sept 5, the market suffered a sharp decline. Even though bankers and government officials assured the country that there was no cause for concern, the market ignored it. When customers began selling their holdings due to their inability to meet margin calls, the market fell further. The panic reached its peak on Oct 29, 1929. Prices fell almost perpendicularly. And by the time the lows were reached in 1932, most blue-chip stocks had fallen 95 per cent.

Due to space constraints, I cannot list all the speculative crazes and madness in the history of the stock market. But suffice it to say that similar mad chasing of returns occurred from the 1960s onwards. In the 1960s and 1970s, it was about growth stocks such as IBM and Texas Instruments. They were sold at ridiculous prices but buyers bought because they firmly believed that others would be willing to pay a much higher price.

In the 1980s, it was about new issues - otherwise known as initial public offers (IPOs). This was especially so for biotechnology companies, which may have had no current earnings to show but simply a pipeline of potential products that might never get the chance to see daylight.

Closer to our memory is probably the biggest bubble of all time: the Internet bubble. It was the year 1999, when I was still new to the wealth management industry. All I remember is that everyone was buying technology and Internet-related shares and unit trusts. Everyone felt that the future was in the Internet.

You looked stupid if you stayed off such investments. You see, the Internet represented a new technology that offered new business opportunities that promised to revolutionise the way we obtained information and bought goods and services.

Even though many Internet-related companies had no earnings to show at all, but simply a concept or hot idea, speculators flocked to them as long as they had a dotcom attached to their name. Even professional managers believed in this (see table) and the bulk of these tech funds were set up in 1999 and 2000. So how could everything go wrong? In the middle of 2000, Nasdaq crashed.

So how does knowing the history of stock markets help us? In a nutshell, this time is no different. Investment professionals often say: 'This time is different.' I disagree. I say there is nothing new under the sun. The history of the stock market shows us that 'tulip-mania' has repeated itself since the 17th century.

The greed of humans will keep them buying, even though prices are highly ridiculous. And, equally, panic will make them sell when they realise how ridiculous they have been. Most of us never learn from history - we always succumb to that desire of making lots of money in the shortest period of time.

The Internet bubble showed clearly that professionals are not always right; in fact, many times, they are wrong. How could fund managers, investment advisers and wealth managers (so-called experts) not have known that those Internet stocks were selling at ridiculous prices? Well, many probably knew, but they eagerly fed people's greed, as they satisfied their own desires - maximisation of profit and advancement of career.

Human sentiment does not determine the true value of your investments. While we all hate to lose money, we dislike it even more when others are seemingly making lots of it and we are not. So we follow the crowd. When everyone sells in fear, we believe in the majority and follow suit. We don't realise that a majority decision doesn't always mean the right decision, or that human sentiment has no bearing on the true value of a business.

So how should we invest? Using stockmarket history as a lesson, it is really not difficult to make money from investing. Find sound businesses with long-term sustainability and a reasonable price. Ignore short-term fluctuation as it has nothing to do with such businesses. Ignore what professionals tell you - especially those who make more money selling you than advising you. Invest in stocks for the long term.

Sound simple? Well, it really is that simple - but unfortunately, not easy. Many may not know how to identify good businesses. Short-term fluctuations may cause us to lose sleep and give us ulcers. And professional advice seems too hard to ignore. So what can we do?

To avoid having the need to pick the right stock, buy all the companies in the stock market through a low- cost index fund or ETF (exchange-traded fund). If you dislike the fluctuations, diversify your investments over different geographic regions and asset classes. Ignore short-term noise, as the human greed and fear have absolutely nothing to do with your long-term investments. In fact, if you are a long-term investor and a net saver, you should rejoice when the market falls as it presents you with a chance to buy at sale price. When the market is rising wildly, you should be sad, as there is no opportunity to save.

If you have to listen to a professional, make sure you choose one who takes care of your long-term goal rather than one who only wants to fulfil his own short-term ambition. How can you know - and how can you ensure - that an adviser will deliver what he promises? Instead of paying him a huge commission for each product he sells you, put him on a regular payroll instead. Get rid of him if he can't do the job. We are compensated this way ourselves - so why should we pay our advisers differently?

So, should you be worrying too much about the current sub-prime crisis, the credit crunch, commodity inflation and the US economy, etc? Having gone through the Asian financial crisis, the Internet bubble, Sars, the Iraq war and the oil price surge over the past 10 years or more, and having read the history of the market for the past 300 years, I can tell you this: just as the sun will rise from the East and set in the West, the market will fall and rise again. It has always been and it will always be. If you have made your investments correctly, sleep well. Tomorrow is a new day.

This article was first published in The Business Times on April 30, 2008