It was one of the first “bubbles” in stock-market history, and even Isaac Newton got caught up in the rush.
In an updated edition of Benjamin Graham's investing classic "The Intelligent Investor," The Wall Street Journal’s Jason Zweig summarized Newton’s experience:
"Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he 'could calculate the motions of the heavenly bodies, but not the madness of the people.' Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, 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. For the rest of his life, he forbade anyone to speak the words 'South Sea' in his presence."
WHAT DID WE LEARN
By any practical measurement, Newton was one of the smartest individuals to ever walk the planet. Investing isn’t about smart and stupid, it’s about what works and what doesn’t.
Newton violated all of our three investing principles
1) No one can predict the future
2) Markets trend
3) Manage risk (with a plan!)
Understanding and practicing any of these principles would have helped Sir Isaac avoid this catastrophic loss in wealth.
Stay tuned for more of our investing principles in action.