Speculation & Innovation

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Visualizing History 

The Electric Vehicle Company Stock Price: 1899 – 1907

“The Electric Vehicle Co. was founded in 1897 and as other electric vehicle manufacturers went bankrupt, it took over their factories. The company took control of the Motor Vehicle Co. of Elizabeth, NJ, the Pope Manufacturing Co., the Columbia Automobile Co. and the Columbia Electric Vehicle Co. of Hartford, NJ, but went into receivership on December 10, 1907. The company issued over $10 million in common stock, over $8 million in preferred and paid 8% in dividends on the common and preferred in 1899, but as profits failed to materialize, the stock price collapsed.”

Source: Global Financial Data 

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From the Archives

Illustrated Description of All Motorcars Sold in USA (1907)

Sections:

• Gasoline Cars
• Steam Powered Cars
• Electric Cars

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Sunday Reads

I haven’t been this excited about a Sunday Reads in a while so strap in, people. It’s time for a deep dive.

We’re going to talk about the recent boom in electric vehicle (EV) companies, as it seems that a new EV startup is making headlines or going public via a SPAC every 3 days, and the stocks of anything even loosely related to electric vehicles are soaring. In talking about this EV boom, there are two primary themes that I want to cover: the long history of electric vehicles and investor behavior.

Electric Vehicles: A 19th Century Innovation

The electric vehicle is nothing new. It will come as a surprise to many readers, but the electric car was invented almost 200 years ago, in 1832. In fact, the first electric vehicle was built 50 years before the first internal combustion engine vehicle (ICEV).

During the 1890s, EVs outnumbered other vehicles 10-to-1, and by 1912 there were 38,842 electric vehicles on the road. 

In an era when America’s road system was poor and undeveloped, electric vehicles thrived as the vast majority of driving trips were short-distance, making an EV’s “range” a non-issue. However, some of the early EVs had a mileage range of 180 miles off a single charge! The picture below shows an early charging station in 1912:

At the time, internal combustion engines were also undesirable because they were physically demanding (and often dangerous) to start. Gasoline cars had to be “hand-cranked” to start, and this process was known for breaking the owner’s wrists / arms. This problem proved so pervasive, in fact, that the term “Ford Fracture” was popularized following the injuries sustained while hand-cranking early Ford models. Electric vehicles, on the other hand, were easy to start and did not require the hand-crank method. Since they were not physically demanding to start like the internal combustion car, EVs became incredibly popular for women drivers. Even Henry Ford’s wife drove an electric vehicle.

To really see one of these early EVs in action, watch Jay Leno drive his 1909 Baker Electric, which could travel up to 100 miles on a single charge:

So, instead of the recent boom in electric vehicles representing a “new” alternative for internal combustion vehicles, EV’s are in the early stages of a century long comeback to reclaim their spot as the dominant vehicle. To really drive home how similar the “new” ideas in the EV industry today and those of the early 1900s are, consider the comparisons below:

This all begs the question, what led to the original downfall of EVs? Well we’ll get to that later in the linked articles, but in short:

“By 1912, the gasoline car had already taken over the largest share of the automobile sales (more than 90 percent). They were faster and could drive longer distances – not only because of their better range but also because of a more elaborate refuelling infrastructure. The rapidly expanding paved road network worked in their favor, too.“

Internal combustion engines became much cheaper than electrics. In 1908, Ford introduced its mass-produced (and gasoline powered) Model-T, which initially sold for 850 dollars – two to three times less than the price of a similar electric vehicle. In 1912, the price of the Model-T came down to 650 dollars. That same year, the electrical starter for gasoline vehicles appeared, and took away one of the last selling points of EV’s. Last but not least, gasoline had become much cheaper than it had been at the end of the 19th century.

The only advantage left was the (potential) cleanliness and noiselessness of electric vehicles, the reason we want them back today. In 1914, Henry Ford announced the marketing of a cheap mass-produced electric vehicle, but this automobile was never produced.“

SPACs, Electric Vehicles & Speculation

As a species, we are remarkably predictable. Particularly when it comes to investing. Since I began writing and posting content about financial history, I have received variations of the same question in basically every conversation, podcast appearance, etc.:

“What are some of the specific and identifiable patterns / trends that repeat themselves in financial history?”

While there is no shortage of suitable answers, today I want to focus on a concept that was popularized by Warren Buffett, but appears in historical sources as early as 1866: The Three I’s (Innovators, Imitators, Idiots).

In a 2008 appearance on Charlie Rose, the host asked Warren Buffett: “Should wise people should have known better” during the financial crisis? Buffett responded:

“People always should know better. People don’t get — they don’t get smarter about things that get as basic as greed. You can’t stand to see your neighbor getting rich. You know you’re smarter than he is and he’s doing these things and he’s getting rich. And your spouse is getting unhappy with you because you aren’t doing. Pretty soon, you start doing it. 

So you get what I call the natural progression, the three I’s, the innovators, the imitators and the idiots. Everybody just kind of goes along and you look kind of silly if you disagree. You can have these crazy Internet valuations in the late 1990’s, but they proved themselves out in the market. I mean, the next day, they were selling for more than they were the day before. And people said, you’re crazy if you don’t get in on this. It’s very human.”

As I alluded to, investors were already aware of this “Three I’s” concept back in 1866, as an issue of The Economist demonstrates:

Kind of depressing, isn’t it? You’d think that if we knew about this Innovator -> Imitator -> Idiot progression in 1866, we’d have learned how to avoid it in the 21st century. Nope!

Today we see this with the boom in electric vehicle companies. No matter your view on Tesla or Elon Musk, there is no debating the fact that Tesla’s stock price has soared more than 300% since the middle of March. As of today’s post, the stock has returned 530% over the last year. Retail speculation and excitement surrounding Tesla has boomed this year as speculative trading became easier than ever through commission-free trading and government provided stimulus checks.

As always, however, the next phase of speculation was increased trading in other electric vehicle companies that might be “the next Tesla”. It is no coincidence that the boom in new EV companies has coincided with the parabolic rally in Tesla’s share price. Investors who may have missed out on the Tesla trade, but saw how much other investors profited, plowed money into new EV companies like Nikola, Li Auto, Nio and others in the hopes of benefiting from a Tesla like rally. It’s the same as it ever was.

History is riddled with examples of speculative fervor stemming from people seeing the outsized returns generated on an innovative technology or company. After missing out on the dramatic success of this innovation or stock, investors will herd into the next best option in efforts to achieve similarly outsized returns.

In today’s post we’ll look at a few examples of this:

• The 17th Century Tech Bubble in London
• South Sea Bubble
• British Bicycle Mania

After that lengthy introduction, let’s dive in!

Technological Revolutions and Speculative Finance: British Bicycle Mania

“Technological revolutions are often accompanied by substantial stock price reversals, but previous literature has produced competing explanations for why this is the case. This paper brings new evidence to this debate using data from the innovation-driven British Bicycle Mania of 1895-1900, in which cycle share prices rose by over 200 per cent before collapsing by more than 75 per cent. These price patterns are not fully explained by fundamentals or by changes in the nature of risk associated with cycle shares. Instead, the evidence from the Bicycle Mania supports the hypothesis of Perez (2009), who argues that new technology, high short-term profits, and loose monetary conditions increase the level of speculative investment, ‘decoupling’ share prices from fundamentals.”

The Cycle Mania

“The growth of the cycle industry between 1895 and 1900 had its origins in a series of technological innovations. The ‘safety’ design, diamond frame, and pneumatic tire made for a much more comfortable ride, and the use of ball bearings and new processes for producing weldless steel tubes substantially increased British productive capacity. The widespread adoption of the pneumatic tire in 1895 resulted in a rapid increase in demand for bicycles, which existing producers struggled to meet. There was thus a rapid increase in the number of registered cycle manufacturers in Britain: Harrison reports a fourfold increase between 1889 and 1897, with the majority based in the West Midlands. Rubinstein estimates that at the height of the boom in 1896, 750,000 bicycles were produced per year, and 1.5 million people cycled, at a time when the population of Britain was around 35 million.”

In April 1896 a British newspaper argued that “cycle shares promise to become as inflated as the tires”. There was ample reason for such a statement, as the table below exhibits how many new cycle companies were being floated at the time of Cycle Mania.

Again, we see the recognizable pattern of companies forming following a dramatic rise in shares of stocks related to a new technology:

For another great look at the Bicycle Boom of the late 19th century, make sure to read this fascinating piece by a new writer who will surely surpass me as the finance history guy in short order: Soren Peterson. I would highly encourage everyone to check out his work, and subscribe to stay up to date on all his new posts. Soren is great. Pedal Pushers: When Bikes Became the Vehicle for a Bubble

An Undertaking of Great Advantage, But Nobody to Know What It Is

While the the author of this article, Dr. Andrew Odlyzko, points out that the story is probably apocryphal, one of the most repeated stories of the South Sea Bubble was the promotion of a company that “lured investors into putting money into “an undertaking of great advantage, but nobody to know what it is’.”As Odlyzko notes, however, even if that specific anecdote is apocryphal there were equally ludicrous examples of investors blindly investing their money while chasing returns. For example, while the South Sea Company gets all of the focus for it’s dramatic rise, William Goetzmann and his co-authors demonstrate just how parabolic the returns in another exciting new industry were at the same time: Insurance firms.

Is it any wonder, then, that while Insurance firms were generating enormous returns in the stock market that investors succumbed to the schemed described in this article?

“Starting on Friday, December 18, 1719, the Daily Post carried for several days an ad for an ‘extraordinary scheme for a new insurance company to be proposed, (whereof publick notice will speedily be given in this paper),’ with ‘permits to subscribe’ offered for £0.05 each. No names of projectors, nor details of the scheme were cited.

The sale of the ‘permits’ took place on Thursday, December 24. Two days later, this same paper had an ad which offered refunds for the ‘several hundred’ of those permits that had been sold and explained that the whole thing was a hoax designed to show how easy it was to ‘impose upon a credulous multitude’.”

As expected, the South Sea Bubble of 1720 offered a perfect example of how investors will herd into newly formed companies following the outsized success of a particular stock in the hopes that they will “hit the lottery” and experience a similar rally.

“The ebullient atmosphere of 1719 offered new opportunities to promoters, and they began soliciting money from investors. Figure 1 [below] shows, in the scatter plot, the number of new projects announced each month, but multiplied by 10, so that the 88 projects of June 1720 correspond to 880 in the figure. These numbers are taken from William Scott’s The Constitution and Finance of English, Scottish and Irish Joint-stock Companies to 1720. As can be seen, out of the almost 200 projects that Scott tabulated, only 13 were started in 1719. But they were noticed by many observers. Also noticed was what seemed to many skeptics to be the inordinate credulity of the public that was eager to get involved. This led to the first of the events that likely inspired the ‘undertaking of great advantage, but nobody to know what it is’ fable.”

The Birth of Electric Cars

With their access to financial data stretching back centuries, the team at Global Financial Data cover the birth of electric vehicles in the late 19th century, and what the stock returns were for some of these early EV pioneers.

“What was it like in the beginning? What type of companies were born when automobiles were introduced over 100 years ago? When we looked back at the first automobile companies that issued stock in the United States, we found an unexpected surprise, all of the first automobile companies that issued stock in the 1800s were electric automobile companies! Gasoline-powered cars didn’t appear until the 1900s. Tesla is bringing back an old tradition, not introducing a revolutionary change.

The first automobile companies to issue stock raised their money at the end of the 1800s. The General Electric Automobile Co. issued stock in 1898, the Electric Vehicle Co., the New England Electric Vehicle Transportation Co. and the Pennsylvania Electric Vehicle Co. issued stock in 1899. In fact, electric autos outsold steam and gasoline-powered cars in 1899 and in 1900.

Although we may not realize it, electric automobiles were the preferred means of transportation in the first decade of automobiles. Not only were electric cars cleaner than their internal combustion competitors, but they were easier to start. By 1899, the electric La Jamais Contente was the first car to break the 100 kph speed barrier, and Thomas Edison preferred an electric car to the overly mechanical internal combustion automobiles, but within a decade, the gasoline-powered car became the clear choice, so what went wrong?”

London’s 17th Century Tech Bubble

The 1690s tech bubble in London was partially sparked by a successful treasure hunt that led to an explosion in new “seawater diving engine” companies that promised investors similar treasure hunting success with exciting new technology that would enable more efficient treasure hunting expeditions.

The successful treasure hunt was carried out by Sir William Phips, who decided to try his luck at locating the Almiranta, a Spanish ship that had sunk in the West Indies during the 1640s and was rumored to have unimaginable riches on board. After deciding he would pursue this long lost treasure, Sir Phips traveled to London in search of an investor to fund his journey.

Phips found his 17th century venture capitalist in the Duke of Albemarle, and his syndicate of investors. The group of financiers quickly formed a small joint-stock company for funding the expedition. This was truly ad-venture capital.

As it turned out, the Duke of Albermarle proved to be one savvy VC. After endlessly searching for the sunken Almiranta, Sir Phips finally located his treasure in 1687. The spoils were so great that Phips and his crew spent over two months hauling up 32 tons of treasure from the ocean floor. 32 tons.

Upon the treasure hunter’s return, the Duke of Albemarle and others received an astronomical 10,000% return on investment.

As for the captain himself, Phips took an 11% cut of the profit, which amounted to £12,000. This was an absolute fortune, as the average income for a merchant in 1688 was £400. After witnessing the eye-watering returns to investors in Phips expedition, speculation and imitation boomed.

“The diving-engine with its attendant wreck-fishing expedition was the epitome of 1690s projecting. Intense excitement had been generated in the late 1680s by Phips’s lucrative treasure hunts in the West Indies. The relative failure of several subsequent expeditions dampened hopes, but prospective investors could be assured of success by the use of a patented diving bell or suit that would allow its occupant to stay underwater longer than ever before. As the poet and projector, Aaron Hill, commented on Phips’s expedition, “never sure were nay men of common sense embarked in a more unpromising adventure; ’twas above a million to one against them”, but through its spectacular success “a thousand families have been since undone, by sending their estates a diving after shipwrecked treasure”. Five patents had been issued for diving engines between 1672 and 1689; 17 petitions were filed between the autumn of 1691 and late 1693, of which 11 were enrolled. Alone they accounted for almost one-fifth of all patents issued in 1691-3.”

(I went on the Bloomberg Odd Lots Podcast in 2018 to discuss this 17th century tech bubble. Listen here.)

The Rise & Fall of Electric Vehicles in 1828 – 1930

An excellent overview of the EV industry’s early years:

“The dawn of commercialization of electric vehicles is upon us. Nevertheless it is very interesting to note that commercialization of electric vehicles was in fact successful in the early 20th century. This paper scans our past in the research, development, and commercialization of electric vehicles commencing from their invention in 1828 until their almost nonexistence in 1930. Their features in the technology development, production from small scale to commercial scale, applications from private users to commercial ones, and the corresponding charging infrastructure and business model are all analyzed and compared with the present development. Therefore, lessons can be learned from history to speed up our present development and avoid the same mistakes as in the past.”

The 1690s Patents Boom: Invention or Stock-Jobbing?

This paper takes a deeper look at the explosion in patents related to seawater diving following the massive success of William Phips treasure hunt.

“Speculation had already been fueled by the unusually profitable wreck-fishing expeditions of Captain William Phips to the Caribbean in 1685 and 1687, which raised hopes of instant wealth from a small investment...

The diving-engine with its attendant wreck-fishing expedition was the epitome of 169os projecting. Intense excitement had been generated in the late 168os by Phips’s lucrative treasure hunts in the West Indies. The relative failure of several subsequent expeditions dampened hopes, but prospective investors could be assured of success by the use of a patented diving bell or suit that would allow its occupant to stay underwater longer than ever before. As the poet and projector, Aaron Hill, commented on Phips’s expedition, ‘never sure were nay men of common sense embarked in a more unpromising adventure; ’twas above a million to one against them’, but through its spectacular success ‘a thousand families have been since undone, by sending their estates a diving after shipwrecked treasure’.

The fervor for new technology and rampant speculation at the time is demonstrated by the increase in patents overall during this period, but “diving engine” patents specifically:

“Five patents had been issued for diving engines between 1672 and 1689; 17 petitions were filed between the autumn of 1691 and late 1693, of which 11 were enrolled. Alone they accounted for almost one-fifth of all patents issued in 1691-3… Some of the engines seem to have served their purpose, but there is no record of any repetition of Phips’s success.”

As expected, the plethora of imitator companies were unable to replicate the success of William Phip’s success, despite the patent boom and excitement for diving technology companies.

 

 

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