I think we can all agree that Isaac Newton was brilliant.
According to the Stanford Encyclopedia of philosophy, he invented calculus and formulated the theory of universal gravity.1
He also made a terrible trade in the markets.
The book Big Mistakes: The Best Investors and Their Worst Investments recounts this epic failure:
In 1720, as shares of the South Sea Company began to rise and hysteria swept the streets of London, Newton found himself in a precarious situation. He bought and sold the stock, earning a 100% return on his investment. Except shares of the South Sea Company rose eightfold in under six months, and they did not stop going higher just because he decided to collect his profits. Unable to cope with the feelings of regret, Newton jumped back into the stock with three times the amount of his original purchase. He reentered as shares approached their apex and instead of doubling his money, he would lose nearly all of it. When the bubble burst, it took just four weeks for prices to plummet 75%.2
Smarts ≠ Investment skill.
There are many lessons here.
- One: just because you are smart does not mean you are immune to hysteria. Anyone can be a sheep and follow the crowd.
- Two: you can make a good trade one day and make a really bad one the next.
- Three: you can be really smart in one domain and look like a fool in another.
- Four: losing money fast is easier than making money fast.
- Five: you can have nice hair and still make mistakes with money. ;)
If only more of us subscribed to the First Law of Newtonian Financial Planning: “I can calculate the motions of the heavenly bodies, but not the madness of the people.”3
The science of human behavior is unpredictable.
Or maybe it’s something so predictable that we consistently refuse to believe it.
- Quoted in the above.