Tuesday, January 23, 2018

"Sir Isaac Newton: Scientific Genius, Investing Fool"

Jason Zweig writing at MoneyBeat:
In a column in November, “Isaac Newton Learned About Financial Gravity the Hard Way,” I looked at a new study of the investing career of the great physicist.

The great scientist was a hapless investor, careful research by scholar Andrew Odlyzko found. Now, in an updated version of his study, Prof. Odlyzko documents that Newton fell even harder than previously thought for one of the worst speculative bubbles of all time.

In 1720, shares in the South Sea Co., the global trading firm that was also seeking to restructure the growing debts of the British government, went up roughly five-fold in four months, only to crash by year end.

Newton got in on the ground floor, buying around 1712. He cashed out early, too, selling 80% of his holdings in April and May 1720 at a profit of at least 20,000 — a bonanza equivalent to approximately $4 million in today’s money.

Then, however, South Sea stock doubled over the next few weeks, and Newton seems to have panicked, buying back in at twice the price he had sold at. After another 8% rise, he bought even more.

 When the bubble burst, Newton lost about 77%, estimates Prof. Odlyzko.

That’s not all, however. In an update of his research paper, Prof. Odlyzko documents that Newton didn’t manage only his own money. The great scientist also was an executor for the estate of Thomas Hall, a government official who died in 1718. Newton plunked a portion of Hall’s estate into the South Sea bubble, too.
An account book from the estate, formerly in the collection of the economist John Maynard Keynes, records that on May 21, 1720, Newton personally went to the South Sea Co.’s headquarters to buy about £7,000 worth of its securities.
Previously on non-financial Newton:  
Cambridge Puts Newton’s Papers & Annotated Principia Online!
"The Strange, Secret History of Isaac Newton’s Papers"
"Royal Society opens archive, kills productivity" (Newton's First Published Paper; Franklin and the Kite, etc.)

And a couple pieces on the South Sea Bubble you may not have seen:
Prop Trading the South Sea Bubble: Hoare's Bank 1720 
"Great Moments in Hot Stock Tips", Alexander Pope Edition
Murphy A. (2009) The smartest boys in the alley, early derivatives on the London stock market