Lessons from Newton’s South Sea Bubble Disaster

If I were to postulate that Sir Isaac Newton (1642 – 1727) was one of the most brilliant minds the human race has ever seen, I would have ample evidence to support my position. The English physicist and mathematician is legendary in his contributions to the advancement of mankind.  Newton is credited with inventing the reflecting telescope in 1671. Newton also developed his three laws of motion, described in his publication the Principia Mathematica, which remain a cornerstone of modern physics. His law of universal gravitation laid the groundwork for others’ work in the field of physics, including Albert Einstein. Newton also shares credit with Gottfried Leibniz in developing the mathematical field of Calculus.

Yet for all his brilliance in the fields of science and mathematics, Newton proved to be less than brilliant as an investor. Research recently published by Professor Andrew Odlyzko of the University of Minnesota closely tracks and analyzes Newton’s experiences in investments.  According to Odlyzko’s research, Newton was a successful and prudent investor for a great deal of his life. By 1720, Prof. Odlyzko estimates that Newton had amassed £32,000 (worth about $5.7 million today) through a diversified investment strategy comprised of stocks and government bonds. A careful and shrewd investor to this point, Newton was one of the earliest investors in the South Sea Company with his initial investment beginning in 1712.

If the South Sea Company sounds familiar to you, it is likely that you heard or read about the infamous South Sea Bubble that roiled everyday investors and royalty in London and Great Britain in 1720. Speculative interests drove the value of the shares of South Sea Co. from 200 in March of 1720 all the way up to nearly 1,000 in June and July, before the shares crashed back below 200 over a few weeks time.  Despite his disciplined approach to scientific and mathematical discovery, Newton was caught up in the speculative fever of the moment, buying and selling shares several times along the roller coaster ride. Prof. Odlyzko writes of Newton, “As the bubble continued inflating, it appears that he panicked.”  Odlyzko adds “…Newton did not just taste of the Bubble’s madness, but drank deeply of it.”  Prof. Odlyzko estimates that Newton lost as much as 77% during the bubble, or £22,600 ($4.1 million today).

While Newton hardly died destitute, leaving an estate valued at £30,000, his speculating experience provides valuable lessons to investors today. It can be very tempting to let emotions sway our investing decisions, and even the most disciplined and logical investors can fall prey to speculative bubbles. Greed and fear are powerful emotions, as Newton’s experience point out. Having a disciplined investment strategy, as Sir Isaac Newton possessed for most of his life’s investments, will help investors avoid their own South Sea Bubble experience.

Sources:  Newton’s financial misadventures in the South Sea Bubble, Wall Street Journal