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October 19, 2005

Marginal Revolution Loses a Bet

Railway shares:

Marginal Revolution: The Undercover Economist, part II : I once made the mistake of entering into a sportsman's bet with the economist John Kay. He wondered what would have happened if you had bought shares in the Great Western Railway, the most famous of all the rail companies in Britain, the birthplace of train travel. He speculated that even had you bought them on the first day they were available, and held them for the long term, your returns would have been quite modest, say, less than 10 percent a year. I couldn't conceive that one of the most successful companies of the railroad revolution could have possibly returned such a modest sum to shareholders. Off I went to flick through dusty nineteenth-century editions of The Economist and find out the answer. Of course, Kay was right. Not long after the Great Western Railway shares were put on sale for 100 pounds a share in 1835, there was a tremendous burst of speculation in rail shares. Great Western shares peaked at 224 pounds in 1845, ten years after the company was formed. Then they crashed and never reached that level again in the century-long life of the company. The long-term investor would have received dividend payments and would have made a respectable but unremarkable 5 percent annual return...

Posted by DeLong at October 19, 2005 10:11 PM