Isaac Newton and The Stock Market | Exploring Markets

Isaac Newton and The Stock Market

Sir Isaac Newton is one of the most important scientists in human history.

Newton discovered gravity and he's considered one of the founders of Calculus. Without him, human civilization and technology could still be in standstill. Would we have airplanes or satellites? Would we understand space and the planets around us? That's how influential Newton was. But still, there was one thing Newton could not figure out... and that was the stock market.

Indeed, one of the smartest men in history almost went broke trying to trade stocks:
"The South Sea Company was formed in 1711 to help deleverage the British government by assuming some of the government's debt and paying it off with the proceeds of a stock offering. In exchange for performing this service for the Crown, the company received a monopoly for trading with the Spanish colonies in South America and the exclusive right to sell slaves there. 
Demand for the company's stock was strong due to the expectation of great profits from these endeavors, although none ever materialized. In 1720, a speculative mania took flight and the stock soared. 
Sir Isaac Newton, who was the Master of the Mint at the time, joined many other wealthy Englishmen in investing in the stock. It rose from £128 in January of l720 to £1,050 in June. Early in this rise, however, Newton realized the speculative nature of the boom and sold his £7,000 worth of stock. When asked about the direction of the market, he is reported to have replied "I can calculate the motions of the heavenly bodies, but not the madness of the people."
By September 1720, the bubble was punctured and the stock price fell below £200, off 80% from its high three months earlier. It turned out, however, that despite having seen through the bubble earlier, Sir Isaac, like so many investors over the years, couldn't stand the pressure of seeing those around him make vast profits. He bought back the stock at its high and ended up losing £20,000. Not even one of the world's smartest men was immune to this tangible lesson in gravity." 
- Howard Marks, Oaktree Capital
By the way, 20,000 pounds in 1720 is worth more than $5 million today. So yes, Newton lost $5 million trying to trade stocks. His famous quote follows below.