Investing Scams Aren’t New: 5 Lessons from the Great British Bicycle Bubble | Personal-finance

The great British bicycle bubble, in a nutshell

Bicycles had been around for a long time, but it was only in the late 1800s that they became extremely popular — due in large part to improvements made to them, such as pneumatic tires that offered smoother rides and chains to provide leverage without requiring a huge front wheel.

As the prevalence of bikes increased, so did business activity related to bikes. Birmingham was a center for cycling, and bicycle manufacturers there numbered 72 in 1889 — with that number surging to 177 by 1895, per Quinn and Turner. They also note that patents related to bicycles went from 595 in 1890 to 4,269 by 1896, and they ended up representing 15% of all new patents issued.

During this boom, there was a frenzy of investing in bicycle companies, with some investors getting rich and many investors losing their shirts. There was an early form of leveraged buyouts going on at the time, with some folks borrowing a lot of money, buying bicycle-related companies, and then selling shares of those companies to the public, while pocketing much more than they paid for the companies.

Let’s look at some mistakes made during this bubble that are instructive to investors today.

Mistake No. 1: Ignoring the character of key players

Just like many investors today, investors of yesteryear often were not aware of the character of the people behind the investments they made. Had they taken the time to try to meet them, ask around about them, or see if they had made news in the past, they might have found that some of them had not succeeded in previous businesses.

Source Article