Newton’s bull trapped in stock market

Newton Isaac (1642-1727) has a Chinese name in China. His surname is Bull by transliteration from English to Chinese. Bull is also used in stock market when stock price is high. Coincidentally, Newton bought stocks when the market was bullish.

Newton Isaac was an English mathematician, astronomer, and physicist (described in his own day as a “natural philosopher”) who is widely recognized as one of the most influential scientists of all time and a key figure in the scientific revolution.

Newton Isaac invented calculus and conceptualized his three laws of motion. With the help of calculus and three laws of motion, scientists can send human beings to outer space, or even to Moon. Newton obviously wasn’t a dumb person.

Newton was not a smart investor. He lost £20,000 (or more than $3 million in [2002-2003’s] money because he invested South Sea Company. There’s a big difference between being a smart physicist and smart investor.

South Sea Company was established in the early 18th Century and granted a monopoly on trade in the South Seas in exchange for assuming England’s war debt.

Investors warmed to the appeal of this monopoly and the company’s shares began their rise. The mania gripped mostly London over a few months. South Sea Company shares soared almost eight-fold between January and mid-July 1720. South Sea Company was the hottest stock in England.

Britain’s most celebrated scientist was not immune to the monetary charms of the South Sea Company, and in early 1720 he pocketed a 100% profit totaling £7,000 from his stake. He then watched with some perturbation as stock in the company continued to rise.

Newton went on to repurchase a good deal more South Sea Company shares at more than three times the price of his original stake, and then proceeded to lose £20,000.

The chart of the South Sea Company’s stock price, and effectively of Newton’s emotional journey from greed to satisfaction and then from envy and more greed, ending in despair, is shown above.

This prompted him to add, allegedly, that “I can calculate the movement of stars, but not the madness of men.”

In an updated and annotated text of Benjamin Graham’s classic “The Intelligent Investor,” WSJ’s Jason Zweig included a small anecdote about Newton’s adventures with investing the South Sea Company:

“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.”

Some lessons we should learn:

  1. In most cases, we cannot calculate stock price with mathematical formulas, even Newton could not.
  2. Mass behavior impacts stock.
  3. We should not be jealous of our friends when they make profit by stocks.

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4 thoughts on “Newton’s bull trapped in stock market”

  1. Wow I was not familiar with that story about Isaac Newton. I had no idea that he got pulled into the stock craze back in the day and on top of that lost so much money. Isn’t it amazing how people can be so brilliant in one area of life and so terrible in another.

    1. Yes. Everyone could become greedy despite his social status and huge wealth. Sometimes, we can learn some lessons from experiences of other people.

  2. Haha I also read that story in the Intelligent Investor. It’s a good reminder that understanding behavioral psychology is as important as finance if you are going to try and purchase individual stocks. It can be done, but as you say it is not just mathematical calculations. There are many, many considerations and you can’t always come to a firm conclusion on valuation. Newton is a great example of how even incredibly intelligent people can be caught up in the emotional hysteria of market mania’s.

    1. Thank HBFI! As you mentioned, we cannot calculate stock price just with some mathematical models because behavioral psychology affects stock price.

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