History shows that rising share prices are not always good for investors
PUBLISHED: 14:22 14 February 2020 | UPDATED: 14:25 14 February 2020
Sorin Opreanu Roberto
The 'Railway Mania' of the 1840s is a timely reminder of a period when share prices rose too fast before collapsing, says financial expert Peter Sharkey
In a week when HS2 has dominated the news, it seems appropriate to open with a cautionary tale of railway investment…
We begin in Rainhill, Lancashire, home to around 12,000 people, a pleasant village hall, friendly high street and the church of St Bartholomew, an impressive sandstone structure featuring Ionic columns built in 1840.
The majority of Rainhill's residents work in either Liverpool or Manchester, most commuting by train directly into either city, a practice their ancestors began more than 170 years ago. Few commuting rail lines anywhere in the world have operated for so long and, not surprisingly, Rainhill's main claim to fame is railway-related.
As Britain's industrial revolution gathered pace during the 19th century, so England's north west grew at an astonishing rate, with Liverpool and Manchester to the fore of an economic boom, the scale of which makes today's puffed-up talk of a Northern Powerhouse appear trivial by comparison.
By the mid-1820s, however, it became apparent that unless existing transport links between the cities were improved, economic growth would falter.
As was the Victorian way, a group of "prominent local businessmen" formed a company and sought parliamentary permission to build a railway line between Liverpool to Manchester. Opposition from canal and landowners was ultimately overcome and permission to construct a double track line was granted in 1826. Within three years, the line was built.
The next challenge was what form of transport would be used on the rails.
It was decided that a series of trials would be held at Rainhill (because the line there was flat and straight) in October 1829, to determine which design of locomotive was most capable of hauling both goods and passengers. It was George Stephenson's Rocket that emerged victorious.
Stephenson's success had global implications for transport, leading to the rapid development of railways across the world, although the process was not without initial hiccups.
Domestically, high interest rates and anti-railway protests temporarily slowed their development, but by the mid-1840s, after the Bank of England cut interest rates to stimulate the economy (sound familiar?), railway construction gathered pace.
As their share prices rose rapidly, in unison with demand for passenger and cargo transport, railway companies captured investors' attention. Cue Railway Mania, as rail operators lured investors, some offering promotional deals on their shares whereby investors could buy them with a 10pc deposit and the company retained the right to call in the remaining 90pc of the price at any time.
Investors poured into railway companies, creating levels of excitement previously seen during the infamous Tulipmania of the late 1630s.
Yet as proposed railway schemes became more unrealistic and patently less viable, so the penny dropped with investors, many of whom had bet everything on often outrageous rail-related projects proving successful. Between 1846-50, the collective value of railway shares plummeted by more than 50pc, a fall exacerbated by a rise in interest rates.
Let's fast-forward 170 years and consider a similar transport-related mania currently gripping some investors and begin by examining three of the biggest players in the world car market.
Volkswagen, for instance, employs 300,000 people, has 100 factories in 27 countries and sold 11 million vehicles in 2018, generating revenues of $278 billion.
Ford, meanwhile, sold almost six million vehicles in 2018, turning over $160 billion, while General Motors, which operates on six continents, made an $8 billion profit on sales of $147 billion.
By any measure, this trio are among the biggest players in a massive industry. But there's a new kid on the block. Possibly.
Between the beginning of January and early February, a comparatively small, loss-making US car manufacturer which produced 368,000 cars last year saw its share price double. Last week, Tesla, the electric car manufacturer headed by the ubiquitous Elon Musk, boasted a staggering market valuation of $160 billion. To put that figure into context: it's more than the value of Volkswagen, Ford and General Motors combined.
Economic history is littered with examples (think Tulipmania, railway mania, the dotcom boom) of investors behaving illogically in the hope that they will happen upon a "greater fool" who will buy their outrageously inflated stock at an even higher price.
I sincerely hope that Tesla succeeds: electric cars are, undoubtedly, the way forward, but the "irrational exuberance" exhibited by those investors responsible for doubling the company's share price in the space of a month is unhealthy and only succeeds in making the market look like a casino. Today, even the most adventurous investors would think twice before investing in Tesla which, regrettably, indirectly affects the development of electric vehicles.
TAM Asset Management Ltd offer savers the opportunity to invest their savings in Investment ISA portfolios comprising a variety of different funds pursuing long-term cautious, balanced or adventurous strategies. For further details, please visit the MoneyMapp website.
For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.