July 19th, 2024


What goes up ... Sir Isaac meets the market

Paul Greenberg

By Paul Greenberg

Published Nov. 23, 2017

The Nobel-Prize

If one of the greats in the history of mathematics and physics -- Sir Isaac Newton -- could act like any crazed and dazed day trader under pressure, what does that say about the chances of us ordinary folk making a killing in the stock market? It's far more likely that the market will kill us.

Andrew Odlyzko, who professes mathematics at the University of Minnesota, has published a revealing paper on Sir Isaac's speculations in the stock market. According to Jason Zweig of the Wall Street Journal, it seems that after years of prudent, cautious and diversified investing, the great scientist had accumulated a nest egg worth some $5.7 million in today's dollars. He did it by putting his money into a portfolio of stocks and bonds that would be the envy of today's investors. He was the very model of a modern-day citizen of sound financial standing who prospers responsibly, providing goods and jobs for others while doing just fine himself, thank you. May we all be so lucky, or rather foresighted. His trade winds blew neither hot nor cold but just right.

And then ... he went on as wild a binge as any of today's speculators in Bitcoin who think they've found the key to perpetual prosperity through the Internet. Only in Sir Isaac's case, he must have thought he'd found the key to the financial kingdom and a way to make his great fortune greater when he learned of the South Sea Co., a new international firm set up to manage the British government's mounting debts. So he joined the popular rush like all the other financial lemmings and put his money where his impulses were.

All went not only well but superlatively, if only for the briefest time. In April and May of 1720, Sir Isaac sold 80 percent of the stock he'd bought in the South Sea Co. just a few months earlier, and made a profit of almost $4 million in today's dollars. Newton may have been an astrophysicist, but he seems to have forgotten that since the beginning of time all things have been in flux. For the South Sea Co.'s stock continued its rapid rise after his original sale of his stock, and Newton re-invested, paying twice as much as he had sold shares for two weeks earlier. According to Professor Odlyzko's research, Newton's foray into the South Sea bubble appears to have cost his investment portfolio at least one third of its overall value.

The immortal Newton, it seems, would prove as mortal as any other impulse buyer and/or seller, vulnerable as anyone else to the herd instinct. The great discoverer of gravity had lost his footing on solid ground when it came to his own financial affairs. Abstract principle is one thing, practice quite another. And so he went swirling off into the economic universe in search of only a delusionary wealth. It could happen to any of us. And it did in Sir Isaac's case.

The moral of this story, or one of them: Don't take any wooden nickels, or act on tips passed on by your banker, stockbroker, brother-in-law or some bond daddy. Sir Isaac's is a cautionary tale that deserves to be taken to heart. And mind.

For further details about a great man's financial fallibility, see "Isaac Newton Learned About Markets' Gravity" in the Nov. 9 edition of the Wall Street Journal, which is obliged to carry many a tale of financial woe and wealth in times like these. That's why the very phrase "for the foreseeable future" abounds in unconscious irony.

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Paul Greenberg is the Pulitzer-winning editorial page editor of the Arkansas Democrat-Gazette.