We were engaged in bolstering each other up, not for money, for we thought ourselves impregnable in that respect, but by argument in favor of another rise. We knew we were wrong but tried to convince ourselves that we were right.
– William Fowler
I’ve written a lot about financial bubbles recently.
That’s why I was excited to come across a financial bubble I had not yet heard of. I found it in a book by a pair of Irish economists: Boom and Bust: A Global History of Financial Bubbles.
This bubble’s lessons are far more relevant to today’s investors in electric vehicles (EVs) than, say, the history of Dutch tulipmania is.
The Great British Bicycle Bubble of 1896
It’s hard to imagine that something as mundane as a bicycle would spark a genuine financial bubble.
Yet that’s what happened in late Victorian Britain in the 1890s.
First, a bit of background…
The bicycle’s early ancestor was a “dandy horse” – a bike with no pedals, patented in 1818 in Germany.
Over the next 50 years, inventors continued to tinker with the design.
In the 1860s, a French hobbyist attached pedals and a rotary crank to the dandy horse. Voila! A crude prototype of the modern bicycle was born.
Alas, a later penny-farthing design with an enormous front wheel proved both dangerous and unwieldy.
Only in the 1890s did the innovations of chain-driven transmission and inflatable tires combine to capture the British public’s imagination with the bicycle.
Socially, the bicycles freed the British public from the tyranny of railway timetables.
Environmentally, the bicycle was a godsend to the horse manure-caked streets of London.
No wonder bicycles soared in popularity.
At the start of 1896, there were about 20 British bicycle companies. But rapidly growing demand was outstripping supply.
A Birmingham-based property dealer named Ernest Terah Hooley recognized an opportunity.
Hooley purchased a company called Pneumatic Tyre for 3 million pounds – a massive premium relative to its tiny profits.
Following Hooley’s brilliant salesmanship, shares in the now renamed Dunlop Pneumatic Tyre Company soared 1,138% in the spring of 1896.
Share prices of other publicly traded British bicycle companies soon tripled as well.
In 1896 alone, 363 cycle, tube or tire firms floated on the London Stock Exchange. Another 238 were listed in the first six months of 1897.
The British press talked up the bullish bicycle as a historic, game-changing technology. Beginning in April 1896, the Financial Times dedicated a daily page to the share prices of bicycle companies.
A more sober writer at The Economist warned that one bicycle company’s offering demonstrated “a very robust faith in the gullibility of the average investor.”
Alas, investors ignored the naysayers.
And as sure as night follows day, a bust followed the boom.
By December 1897, an index of bicycle-related stocks had fallen by 40%.
In 1898, bicycle stocks traded at an average of 71% below their peaks.
More than 80% of the companies that had participated in the 1890s British bicycle boom would go bust.
The Bicycle vs. EVs
The British bicycle bubble of 1896 has much in common with today’s bubble in EV stocks.
The bicycle bubble and today’s EV boom share…
- A familiar technology that took several decades to reach critical mass. The first commercially produced electric car came to market in 1884 – and flopped.
- Charismatic leaders selling a utopian future to transform society
- An army of true believers with unflinching devotion to “the cause”
- A disdain for traditional measures of valuation, replaced by pie-in-the-sky promises of endless growth
- Endless media hype, with the few skeptical voices mocked or ignored
- Dozens of new entrants to the market selling shares to investors at nosebleed valuations
- Exploding competition leading to oversupply and falling prices
- An inevitable collapse in share prices leaving 80% of the companies bankrupt and small investors holding the bag.
This Is How It Always Ends, My Friend
Yes, the bicycle was a real breakthrough success story.
It helped transform the lives of the British public in ways too many to mention here.
But you can say the same about railroads, automobiles, electricity, radio, moving pictures and the internet.
Each of these technologies also went through the predictable storyline of boom and bust.
The lesson for investors?
New technologies always get overhyped.
They always attract massive amounts of investor capital. Most of that capital evaporates when the boom goes bust.
What remains transforms all of our lives for the better.
As long as investors have a chance to fund innovation, it’s always the same story.
Human psychology never changes.
You can’t skip the boom. And it takes unusual luck or foresight to escape the bust.
The market for EVs will go the way of the great British bicycle boom of 1896.
Valuations of today’s market darlings will crumble. The EV market will crash. Dozens of new entrants will go bust. Most EV investors will lose their shirts.
A century from now, the average investor will give no more thought to EVs than they do to bicycles today.
And one of your great-grandchildren may be writing about the great EV bubble of the 2020s.
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