The South Sea Bubble (1720) — Even Newton Lost
Even Isaac Newton, who discovered universal gravitation, lost a great deal of money in a stock bubble. This is the story of the 1720 South Sea Bubble, a mania that even the smartest man in the world could not avoid.
National Debt and the South Sea Company
In the early 18th century the British government was burdened with enormous war debt. The South Sea Company was promised a monopoly on South American trade in exchange for taking on this national debt, and this "rosy future" sparked an investment frenzy.
Actual trade performance was negligible, but people believed the company would soon make an enormous amount of money and flocked to its shares.
An 8x Surge and Collapse
South Sea Company stock, about 128 pounds in January 1720, soared to about 1,050 pounds by June. It rose more than 8x in half a year. Riding the frenzy, even substance-less ghost companies listed one after another.
But the bubble soon burst. It plunged to about 175 pounds in September and about 124 pounds in December, collapsing more than about -80% from the high. Countless investors went bankrupt.
In the wake of this event, Britain enacted the "Bubble Act" to regulate reckless company formation. The pattern of regulation being created only after a big bubble bursts repeats here as well.
The Genius Newton's Mistake
Isaac Newton bought South Sea Company stock early and sold at a profit. The problem was what came next. As the stock kept rising, he jumped back in near the top and was caught by the collapse. He is said to have lost about 20,000 pounds, an amount close to his entire fortune.
The line "I can calculate the motion of heavenly bodies but not the madness of people" is often attributed to Newton, but the source of this quote has not been clearly verified. Newton's exact loss is likewise uncertain in the record. Still, it has long been recounted as a symbol of "knowledge and intelligence failing to overcome speculative psychology."
Frequently Asked Questions
Q. Why did the brilliant Newton fall for the bubble?
Because intelligence and investing discipline are separate. Newton even realized a profit once, but watching others keep making money, he jumped back in out of the psychology of "I'm the only one falling behind (FOMO)." This shows that no matter how smart you are, you can be swayed by crowd psychology and greed.
Q. How is it different from the tulip bubble?
The tulip mania (1637) was speculation in a physical good (bulbs), while the South Sea Bubble (1720) was a bubble in the modern form of a "joint-stock company." Because it combined a plausible narrative of national debt and monopoly rights, the South Sea Bubble is closer to modern corporate-valuation bubbles.
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