MW AI investors should learn from canal and railway bubbles, Goldman Sachs says
By Louis Goss
Since the invention of the printing press investors have overestimated the money to be made from new technologies and underestimated the potential returns from the new industries that emerge from those new technologies, according to a new Goldman Sachs report.
In a paper that covers almost 600 years of economic history, Goldman Sachs showed world-changing technologies often end up generating relatively small returns compared to those generated by the new innovations and industries that follow.
Goldman Sachs' analysts, led by Peter Oppenheimer, explained this has historically seen market bubbles form around new inventions - ranging from the telegraph to the personal computer - as investors overinvest and overestimate the money to be made.
Instead, the highest returns are often generated by those who capitalize on the changes that are made possible by the emergence of the original inventions and the initial floods of investment capital that let those technologies transform the way the world works.
The analysts said the history of those inventions could provide lessons for those investing in new artificial intelligence technologies: avoid getting caught in the bubble and invest in the companies that will benefit from the new technology instead.
"Mostly, the infrastructure left behind in the wake of the initial investor surge and capex leads to the emergence of new products and services. These are often underestimated or poorly anticipated," Goldman Sachs' analysts said.
Books
Goldman's report notes that the invention of the printing press in 1454 led to an incredible surge in book production over 100 years, from zero to around 3 million printed books per year in 1550, in what eventually led to a collapse in the price of new books.
The invention of the Gutenberg press led to a printing revolution that subsequently led to the creation of the media and fueled innovation - even as the nascent book publishing industry generated relatively underwhelming returns.
Canals
Similarly, the buildout of canals in England during the Industrial Revolution initially saw investors generate strong returns that led to the creation of a bubble on the London Stock Exchange in the 1790s.
Yet returns on investment later slumped from a pre-bubble peak of 50%, to rates of just 5% by the start of the 1800s. A quarter of a century later, just 25% of Britain's canals were able to pay a dividend at all.
The new canal infrastructure, nonetheless, helped fuel England's industrial economy, in allowing for the more efficient transport of goods and commodities, including coal. The shift subsequently led to the development of new sectors including Britain's pottery industry.
Railways
The buildout of new railway infrastructure led to a similar bubble in the U.K. as huge sums of investment flowed into the buildout of new lines across the country, in what saw Britain's networks increase from around 100 miles in 1830 to 6,123 miles in 1850.
The railway stocks bubble saw the value of shares in rail infrastructure builders surge throughout the 1840s, before a slump that, on average, saw those stocks lose 85% of their value compared to their peaks.
Britain's new railway infrastructure, however, helped fuel the country's economic growth, including by making it quicker to transport goods, including fresh food, from the countryside to the U.K.'s fast-growing cities.
The new railways also led to the emergence of Britain's tourism sector - by giving city dwellers new opportunities to visit the countryside - and led to the growth of new sports leagues across the country by letting local football and rugby teams travel to matches more easily.
Telephones
Alexander Graham Bell's invention of the telephone in 1876 led to the growth of an entirely new sector around the turn of the 20th century. This led to the emergence of dozens of new phone companies across America.
One company, AT&T $(T)$, which was founded by Bell himself, quickly started to dominate. The shift saw huge consolidation in the sector. An antitrust settlement later forced AT&T into creating Bell Laboratories, in order to continue investing in new technologies.
Bell Labs subsequently went on to play a key part in developing some of the current era's most important technologies, including the laser, the photovoltaic cell, and the computer coding language C++. AT&T's antitrust settlement also forced it to give up its controlling stake in Western Union Telegraph Company.
Radios
The invention of the radio in 1895 led to a boom in the new radio sector in the period between the two world wars. In the 1920s, this saw shares in radio manufacturer Radio Corporation of America increase from $5 to $500, before they lost 98% of their value between 1929 and 1932.
Still, the wider radio industry continued to grow throughout the 20th century, driven by a boom in the advertising sector. This boom, in turn, led to the emergence of an array of new consumer products which helped fuel America's economic growth.
Personal Computers
The invention of the personal computer led to the creation of hundreds of new, and often highly-valued, computer companies in the early 1980s. A few years later, an array of those computer companies, including Texas Instruments and Coleco, subsequently posted significant losses, in an event referred to as the Video Game Crash of 1983.
Many of those companies later went under, including Commodore, Columbia Data Systems and Eagle Computer. The PC industry, meanwhile, went on to transform the world.
-Louis Goss
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
September 05, 2024 11:18 ET (15:18 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments