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The Railway Mania Bubble: 3 lessons learned from an economic disaster

Updated: Apr 5

The Industrial Revolution in the UK was a significant period in history that transformed the world's economies and societies. The invention of the steam engine and its subsequent use in transportation led to the development of railroads, which revolutionised the way people and goods moved around the country. The demand for raw materials and finished goods grew exponentially, and the need for efficient transportation methods increased. The steam locomotive was a game-changer, and George and Robert Stephenson's improvements to the design in 1814 led to the construction of the first steam-powered railroad, the Stockton-Darlington line, in 1825.


However, it was not until the opening of the Liverpool and Manchester Railway (L&MR) in 1830 that transportation history took a significant leap. This was the world's first modern inter-city railroad, and it sparked widespread public interest and enthusiasm. Many people invested in railway companies, believing that the industry would continue to grow and offer huge returns on investments.


The Railway Mania Bubble | The Globetrotting Investor | Stock Analysis
Source: FocusEconomics

The Railway Mania Bubble burst


This excessive optimism led to a market bubble that would later be known as the Railway Mania Bubble. As railway stock prices rose, more investments followed, pushing prices higher until the bubble burst and prices fell rapidly.


This bubble had several consequences, both short-term and long-term, after it burst. Many investors who had bought railway stocks suffered substantial financial losses when the bubble burst. Share prices plummeted, and several companies went bankrupt or faced severe financial difficulties.


This caused a period of an economic downturn in the UK as the over-investment in railways consumed a sizeable portion of the country's available capital. As the financial reality set in, numerous railway projects that had been planned or were under construction were either abandoned or extensively delayed due to a lack of funding or low demand.


Three lessons learned from the Railway Mania Bubble


As an investor, there are three key lessons I learned from the Railway Mania Bubble that I will apply when making investment decisions.


The first lesson is to diversify investments. Avoid putting all your money into a single industry or asset class. Diversification can help mitigate risks and protect your portfolio. Investing in a mix of industries such as technology, healthcare, and real estate, among others, can help to spread out the risks.


The second lesson is to beware of herd mentality. Do not get caught up in the excitement and frenzy of a booming market without critically evaluating the fundamentals of the investment. One recent example of a hype-up investment that led to a burst is the case of GameStop stock in early 2021. It is important to look beyond the hype and evaluate investment through the lens of a business owner. As Peter Lynch mentioned, “Behind every stock is a company, find out what it’s doing.”



The third lesson ties nicely with what Peter Lynch mentioned, which is to understand the fundamentals. Before investing, take the time to research and understand the industry and the company. Look beyond the short-term trends and evaluate the long-term potential of the investment. It is crucial to assess factors such as the company's financial health, economic moat, management, and performance. Having a clear understanding of the industry and the company fundamentals can help you make well-informed investment decisions.


You can view all the companies’ fundamentals that I analyse here.


Conclusion


In conclusion, the Railway Mania Bubble was a significant event in history that had several consequences, both short-term and long-term, after it burst. As an investor, there are several lessons that we can learn from this event. Diversifying investments, avoiding herd mentality, and understanding the fundamentals are some of the critical lessons that we can apply when making investment decisions. By following these principles, we can make well-informed investment decisions that can help us achieve our financial goals while mitigating risks.

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