Successful Technology, Poor Investment
The Economist describes the British Railway Mania of the mid-1840s as “arguably the greatest bubble in history” (18 Dec 2008).
The world’s first commercial passenger railway line opened in 1830 between Liverpool and Manchester. Before this, goods were largely transported by way of horse-drawn carriages. The railways were revolutionary because they had the ability to move large quantities of raw materials and goods faster and cheaper than ever before. It held the promise of bringing the UK into the new industrial age.
It was a roaring success as rail passengers outnumbered horse-drawn carriages on the same route and the railway became wildly profitable.
The largest speculative bubble begins.
In 1845 alone, the UK government authorised around 4,800km of track, almost as much as the 15 previous years combined. Railway investments at its peak represented half of total investments in the economy.
Investors recognised the opportunity and piled into railway stocks seeing that it had real profits and an impact on the economy. An index of railway shares was 112.7 at the beginning of 1844, it surged to a peak of 167.9 in July 1845. By January 1850, the index fell to 73.5, more than half the peak value just a few years earlier. Some railway shares had fallen as much as -85% from their peaks by 1850.
By 1850, it was clear that rail investors had suffered terribly. On the other hand, the UK had almost 10,000km of new rail network; this infrastructure helped accelerate the UK’s industrial revolution.
History may not repeat itself, but human behaviour does
The British Railway Mania of the 1840s was seen again in the 1990s when the U.S. experienced heavy investments by network infrastructure companies. Collectively, this group spent $30 billion to build 144 million km of fibre-optic cables.
We are all too familiar with the Dot.Com crisis where the Nasdaq index fell some 77% from its peak ruining many investors. The Nasdaq index would only recover and reach a new all-time high 15 years later.
However, the foundation for the information age, Web 2.0, and the networked economy of the new millennium was laid, enabling us to live in a hyper-connected world today.
Successful technologies that have changed the world but failed to deliver returns for investors are a tale as old as time. History shows us that the technological breakthroughs of commercial airlines, automobiles, radio, and the internet have changed the way we live and move, but at the same time, investors have not fared well in the shares of those companies.
Whilst it is true that artificial intelligence or Bitcoin or some other yet unfathomed technology will change the way we live, if history is any guide, investors should be cautioned to enjoy the benefits of new technology but not bet their wealth on it.
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¹The Economist, September 15, 1855, pp. 1010-1011