Greed. Gain. Pain. Series - II

  

  Markets have for now bounced off the lows it fell to last week.  Let's, just as in other things in life, keep focused on our objective that is to educate our readers about greed,  the gain it was supposed to bring and the eventual pain it has bought! 

Greed. Gain. Pain - Series II

The UK Rail Mania –

                                   It happened in the year 1850 at England. England’s economy was growing exponentially and it was backed by it’s new means of transportation – the railways. George Hudson, In mid-1830’s entered the railways business, aggressively expanding the operations and connecting various towns and cities. With growing economy, railways gained momentum and Hudson company had 30% market share in the rail lines and was generating positive cash from operations. This triggered many others to start their own railway companies as the procedure was very simple. All one need is, money & a plan to connect the intended route. Immediately n numbers of people started their company and floated shares to raise money without any proper plans in place. Unlike Hudson, many new companies were interested only in raising money from public rather than running it profitable. Railway lines were set-up in non-economical places and that lead to delay in movements. Increased efficiencies lead to excess supply and lesser demand, which resulted in slowing down the economy. Slowly all the railway companies were reporting losses and the share prices started to collapse along with the economic decline. Share prices declined by 85% resulting in a total loss of about 230 million pounds.

The great depression –

                                     It happened in the year 1929 at the USA. After world war 1, America was growing exponentially well. Their economy was so stable and inflation was moderate. New products were in place creating a sense of prosperity among people and the country. Which resulted in the feeling that the economy will grow as such endlessly in the future. The bull market started believing Federal bank will step in and solve the economics issues through regulations. Slowly, corporate and consumer debt started to rise. As everyone was buying the listed company shares using borrowed money. Consumption, new product innovations and Federal reserve regulations encouraged people to borrow and spend as well as invest more than what was their income. During this period General Motors shares rose 150 times, a random radio selling company went up 76 times and the Dow index went up 6 times touching its life high of 381.7 in 1929 from its low of 63.9 in August 24, 1921. Due to extreme credit leverage the bubble started to bust in September 1929. Over the next 3 years, unemployment was over six times, production output was down severely. Finally, Dow fell to 41.22 points in 1932 from it’s peak of 318.7 points.

History has gifted us more such stories from which we can learn our lessons. We will continue next with them... 

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