"Newton had the great good luck to get into the South Sea Bubble early. He made a really decent investment and a very quick killing, which mattered to him. It was enough to count. He then got out, and suffered the most painful experience that can happen in investing: he watched all of his friends getting disgustingly rich. He lost his cool and got back in, but to make up for lost time, he got back in with a whole lot more (some of it borrowed), nicely caught the decline, and was totally wiped out. And he is reported to have said something like, 'I can calculate the movement of heavenly bodies but not the madness of men.'" - Jeremy Grantham in his most recent quarterly letter
Exhibit 4 in the letter is a chart that shows:
- Newton invests a small amount prior to the bubble
- Newton exits happy in the early stages before the bubble really gets going having made some money
- Newton sees his friends getting rich as the bubble does really get going
- So Newton re-enters near the peak of the bubble with a lot of money
Then, of course...
- Newton exits with the investment essentially a complete bust after the stock then falls roughly back to where he had initially invested just a small amount of money
Chart: Isaac Newton's Nightmare
Seems familiar enough. Newton's behavior nearly 300 years ago doesn't seem unlike what we saw from a number of market participants during the various bubbles of the past decade or so.
Successful investing is less about IQ and more about business sense, discipline, the right temperament, and knowing one's own limits.
Sir Isaac apparently lost what would be roughly $ 4 million to $ 5 million in current terms or practically all (if not quite all) of his stake in the South Sea Company. While the losses he suffered from the South Sea Company was enormous compared to his total wealth, he apparently still did not end up poor by any means. So the investment in South Sea Company itself was, give or take, basically wiped out (something like roughly 90% of his stake) but it did not destroy Newton's entire fortune.
Of course, whether he lost a bit more (as Jeremy Grantham and Marc Faber suggest) or less specifically isn't necessarily of the greatest importance. It's just a good example of how human nature can get the best of a very smart man.
Newton should have known better -- the basic arithmetic needed to figure out the extreme valuation wasn't hard at all compared to the complex mathematics (calculus) he at least helped to invent -- but envy and other aspects of his nature apparently led to a huge misjudgment.
Grantham on Bubbles
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