Sir Isaac Newton (1642–1727) was one of the greatest scientists of all time. Not so great were his stock-market speculations.
They could stand as a lesson for what not to do if you are investing for retirement. Heck, they could even be a lesson for the high rollers who view the stock market as a casino – because Newton had a big score and blew it.
Newton’s scientific achievements included inventing the reflecting telescope, laying out the three laws of motion, and developing calculus mathematics. “Never at rest,” as one biographer described him, he spent his seventies and eighties as Master of the Royal Mint and president of the Royal Society.
With his longstanding interest in alchemy, it should not come as a surprise that Newton had a fondness for speculating on the London Stock Market. His trades were usually prudent – except late in life he put most of his wealth into the stock of one company: the South Sea Co. That trade led him to exclaim:
“I can calculate the motion of the heavenly bodies, but not the madness of people!”
Newton began accumulating shares in the South Sea Co. in 1712. The bullish thesis was solid: the company had a government-sanctioned monopoly on trade with Spain's colonies in South America. True, there was a little complication: a war between Spain and England. But investors had their eye on when hostilities ceased.
During lulls in the war, some trade would arise with the Spanish colonies – mainly in slaves, it is regrettable to say. The next military flare-up would halt the trading. Nonetheless, the prospect of an eventual resolution kept investors keen. Fanning the flames was a burgeoning new medium: daily newspapers (the number of dailies in London went from 1 to 18 during the first two decades of the 18th century).
Rumours circulated about South American gold, silver and other commodities coming to England. Brokerage houses made it easier to buy South Sea’s stock by offering instalment plans with 10% down payments.
By 1720, Newton had sold off all his other financial assets and plowed the proceeds into South Sea stock. He thought it was a sure thing and was all in. He was right initially: the news got really good and the stock shot upwards from £128 in January to £350 in April of 1720. He unloaded most of his shares for a gain of more than £20,000 (about $4 million in U.S. dollars).
After he sold, the stock kept soaring. England was still enmeshed in a speculative frenzy, and watching from the sidelines was hard to take. Acquaintances of Newton were getting rich while thousands of pounds slipped through his fingers.
He jumped back in around £700 a share. The price climbed to £800, making the company worth twice as much as all the land in England.
In the summer of 1720, news broke that some insiders were selling. The stock paused, then dived all the way back to £200. It was a rapid and violent fall, exacerbated by the forced selling of highly leveraged investors unable or unwilling to meet margin calls. Newton ended the year with huge losses, and his shares never did regain their glory before he passed away in 1727.
What Newton did is not for people investing their retirement portfolio. Sure, someone could go for the big score as long as they realized Lady Luck needed to sign up as a partner and come onboard - and in the event of a no show, were prepared to live without a big chunk of their wealth or work into their eighties.
Some people did in fact get rich from the South Sea bubble. One was Thomas Guy. He sold his large stake into the mania phase of 1720. He may not have been as brilliant as Newton but he had character to stand apart from the crowd, And, no doubt, he had some luck too. His fortune remained intact, about a third of which went to building Guy’s Hospital in London.
Some further reading: Andrew Odlyzko’s research in the March 2019, edition of the Royal Society Journal of the History of Science