This Week's Wisdom at a Glance
BRILLIANT MIND, COSTLY EMOTIONS
AN AGE OLD REMINDER
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Wisdom for Life
Sir Isaac Newton was unequivocally a genius as the developer of calculus, the laws of motion, and the laws of gravitation. Surely investing was simple for him too, right?
Well, he was an early investor in the South Sea Company around 1711, which was a British trading venture that investors were convinced was the next big thing. And for a while, it seemed like they were correct. For several years, it is reported that Newton added to his initial equity stake in the South Sea Company, eventually doubling his initial position.
On April 19 and April 23, 1720, Newton decided to sell most of his stake, and he ended up realizing close to a 100% gain.
The problem? The South Sea Company kept roaring higher, and even a genius couldn’t overcome the age-old problem of FOMO. (Fear of Missing Out)
Around a month later (in May 1720), Newton was back into the South Sea Company as an investor, where he continued to add to his position through June. By September of 1720, the stock crashed, and he had lost upwards of at least $3,000,000 (in today’s dollars).
After this episode, Newton is famously attributed for the following remark:
What are our take-aways today?
No matter how intelligent you are, human emotions can easily get in the way of being a successful long-term investor.
Even if you’re trying to be prudent as an investor (which Newton was when he was diversifying away from South Sea stock in April 1720), that prudence can be wiped out quickly with a rash decision.
There are still plenty of modern examples of companies that delivered explosive returns for short periods of time, just to come crashing back to earth later.
This is a good warning and reminder to stay diversified, and not get caught up in chasing performance.
Both of the below examples were market darlings during the pandemic, until they weren’t.
Thanks for reading,
Jack O'Connor, CFP®