Smarter Than Sir Isaac Newton

Investment bubbles are one of those things. We look back on the folly of investors with bewilderment, shaking our heads and thinking, “How stupid people were”.

But are we really smarter than Sir Isaac Newton was 300 years ago? In the fall of 1720, the “South Sea Company” stock bubble burst. It had taken mere months to inflate to its full size. In fact, Newton later remarked: “I can calculate the motion of heavenly bodies, but not the madness of people.” 

Newton wrote ”one of the most influential books on physics and astronomy of all time”. Yet he lost a large part of his wealth at the time. Intelligence, education and even genius are obviously no protection against stock market madness.

Today, artificial intelligence is fueling share prices. Some stocks are soaring to dizzying heights. Are we in a bubble now? If the question were easy to answer, bubbles would never form in the first place.

Investors must follow a clear discipline. Then there is no reason to suddenly throw everything overboard. The danger lies precisely in selling it all to jump into the current hot stocks. This is a great temptation for newcomers to the stock market who finally want to get in on the action and invest all their savings. When prices plummet back to reality, the damage is severe.

Be there everywhere?

It is the fear of missing out that drives us to misfortune. Experienced and successful investors say “no” to almost all investment opportunities. Either because they can't assess the risks and rewards, or because they don't understand the business model. An important lesson in life and in the stock market is: I don't need to, and can't, be in on everything. 

Three centuries ago, Newton was gripped by a mania that cost him dearly. You can read the details at the Royal Society, where Newton served as president from 1703 until his death in 1726. Contrary to some accounts, he died a rich man. His estate amounted to 30,000 British pounds (equivalent to about 20 million British pounds, euros or US dollars today). So it pays to persevere, even after a major setback.