Sometime in the middle of 1720 in Great Britain, Sir Isaac Newton - the inventor of calculus (the branch of mathematics that describes change over time), and the man who framed the laws of motion and set physics on its modern trajectory - put a sizable chunk of his personal fortune into shares of a company called the South Sea Company.
The company had then pursued a new and increasingly risky banking deal - and as insiders began to talk up the trading profits (that turned out fictitious) the company expected from this new venture, the stock began to leap, starting January 1720.
The bubble burst that September. Newton lost 90% of his stake, which was a large portion of his total net worth.
Here is how MIT professor Thomas Levinson described Newton's and South Sea's antics in a 2009 article...
Newton...made his first investment in the South Sea issue early, in 1713, and held it for several years, marking a modest paper profit. He held on through early 1720...That got the desired result, a sudden leap in stock prices. Starting at £128 in January, the price for South Sea securities rose to £175 in February and then £330 in March.
...Newton sold in April, content with his (quite spectacular) gains to date. But then, between April and June, share prices tripled, reaching over £1,000...which is precisely when he could stand it no longer.
Having "lost" two thirds of his potential gain, Newton bought again at the very top, and bought more after a slight decline in July.
The South Sea stock price held up through August 1720, and then the bubble led by over-expectations of huge returns was pricked in September.
...South Sea share prices collapsed to roughly their pre-bubble level. Newton's losses totalled as much as £20,000, between $4 million and $5 million in 21st century terms...It was a terrific blow for Newton.
What brought Newton down?
During bull markets, or when bubbles are building up, most people come to the stock market because they desire to earn money fast, because they are envious of seeing others doing so.
"If he could make money fast in stocks," one would normally ask during such times, "So why couldn't I?"
If geniuses like Newton couldn't stand to watch as others made money, and they carried on with full knowledge that they were purely speculating, what chance do we non-geniuses have to survive a bubble and its subsequent and certain burst?
The legendary investor Charlie Munger says - "If you are comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what? Someone will always be getting richer faster than you. This is not a tragedy."
You see, the real tragedy of our life is not that someone else is getting richer or healthier than us, but that he is getting there faster than us.
The habit of unintelligently buying things because someone else is making fast money on them comes to the fore when the markets have been rising for some time.
After all, isn't it terrible to sit quietly, doing nothing, when some people are predicting the Sensex to touch six-figures soon, and others are dancing to their tunes? Of course, it's terrible!
But if you can't ignore and avoid the temptation that comes from watching other people get rich due to a sharp rise in stock prices, it's best to know sooner than later that that's often a path to destruction.
After the South Sea disaster, Newton could not bear to hear the phrase "South Sea" mentioned in his presence. But just once he admitted that while he knew how to predict the motions of the cosmos, he could not calculate the madness of the people.
So, if you want to avoid such mistakes then consider going in for stock market advice and can use our intraday tip for today to make money in trading or alternatively use our short term stocks to make money in the market.
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