Newton was a financial pioneer. As master of the Royal Mint, he pushed the British government to migrate from silver to gold as its monetary standard, instituted exact weights and measures for coinage and sternly punished counterfeiters.
Newton was also among the earliest to spot the potential in the South Sea Co., the global trading firm that was seeking to restructure the growing debts of the British government. Newton began buying no later than June 1712, less than a year after the company was set up.
That was almost eight years before speculating in the company’s shares became a mania that swept up everyday investors and high society alike. The shares (quoted as a percentage of their par, or nominal, value) shot up from about 200 in March 1720 to nearly 1,000 in June and July, then crashed back below 200 in a few disastrous weeks later in 1720.
Newton -- who held 10,000 shares of South Sea stock in early 1720 -- sold 8,000 shares in April and May at prices around 350, realizing profits of at least £20,000. That was a huge sum at the time, equivalent to nearly $4 million today.
But the price of the shares went almost straight up immediately after Newton sold them, brushing 800 in late May and early June, 1720.
“As the bubble continued inflating, it appears that he panicked”. The great scientist, throwing his rationality to the winds, plunked £26,000 into South Sea shares on June 14, 1720, at a price of about 700 per share -- twice what he had sold them for only a few weeks earlier.
Even worse, in late August, with the shares priced about 750, Newton put another £1,000 into a South Sea security that appears to have been comparable to a call option giving him the right to buy shares at a price of 1,000 each.
At this point, Newton had shifted from a prudent investor with his money spread across several securities to a speculator who had plunged essentially all of his capital into a single stock. The great scientist was chasing hot performance as desperately as a day trader in 1999 or many bitcoin buyers in 2017.
Newton appears to have lost as much as 77% on his worst purchases, or at least £22,600. That’s the equivalent of £3.1 million, or nearly $4.1 million, in today’s purchasing power. Overall, he lost at least a third of his account value.
The words often attributed to Newton were ascribed to him years after his death, so the great man might or might not ever have said that he “could calculate the motions of the heavenly bodies, but not the madness of the people.”
But surely the author of the law of universal gravitation must have learned the First Law of Financial Gravity: What goes up must come down, and what goes up the most will come down the hardest.
