Isaac Newton was one of the greatest physicists to have ever lived. However, he too wasn’t spared by ‘Mr Market’, as he ended up losing £20,000 back then in 1720. How did the legendary scientist burn his fingers in the capital markets with such a raw deal? Jason Zweig points out in the updated version of Benjamin Graham’s classic book- ‘The Intelligent Investor.’
Isaac Newton held stocks of South Sea Company, one of the best performing stocks in England at that point in time. The stock posted a meteoric eight fold rise in less than six months. Isaac Newton didn’t time his exit too well, but doubled his investment nevertheless. Jason Zweig explains , “Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000.”
As the shares of South Sea continued its upward journey, Isaac Newton, just like any other gullible investor re-entered the stock at a much higher price. The bubble soon burst, and the stock plunged, losing more than 80% of its value, leaving Isaac Newton with losses to the tune of £20,000. Jason Zweig writes, ”Swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price – and lost £20,000 (or more than $3 million in [2002-2003’s] money.”
Expressing his view on the direction of the markets back then, Isaac Newton had exclaimed, “I can calculate the motions of the heavenly bodies, but not the madness of the people.” Disappointed by the entire incident, Isaac Newton forbade anyone to speak the words ‘South Sea’ in his presence for the rest of his life writes Jason Zweig.
In his assessment of the episode, Jason Zweig observes, “Sir Isaac Newton was one of the most intelligent people to have ever lived, as most of us would define intelligence. But, in Graham’s terms he was far from an intelligent investor. By letting the crowd override his own judgement, the world’s greatest scientist acted like a fool.” Warren Buffett, the iconic billionaire investor is often quoted as saying, “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ… Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
The inventor of the three laws of motion ended up facing an opposite reaction from the capital markets. At times, the market can get the better of the wisest of people. On a lighter note, Isaac Newton could probably have discovered gravity by investing in the South Sea Company, given that his returns nosedived and went on a downward spiral.