Even though we’ve all heard the phrase, ‘if it’s too good to be true, it probably is’, there are many that will choose to ignore red flags in the hope that this is not the case. This is true even in investment- if fact, I have written many articles on risk tolerance vs reward, and investment scams (I’ll link below). But it seems that investment scams are not a new thing, and even the smartest person could still fall for them! Did you know that even Sir Isaac Newton, the man who discovered gravity, fell for an investment scam!
In the early 1700’s, Sir Isaac Newton lost £20,000 in the South Sea Bubble- this amount would now be worth approximately £4,000,000 today! The ironic thing is that he had actually sold his shares in 1713 at a profit, but then was lured back in and lost it all when it bankrupted Georgian London in 1720.
The South Sea Bubble was a pyramid-scheme backed by the government, at the dawn of fiat currency. The Bank of Scotland had issued the first ever paper bank notes back in 1695, which Newton was a great advocate for. He had previously ran the Royal Mint, and he felt that the Mint could never keep up with the demand for producing coins to keep up with the growing economy.
Naturally, many during this period were suspicious of paper money, because it could be easily forged and had no intrinsic value, and Newton fell privy to many con artists and forged notes, in which he made it one of his missions to seek justice for.
But what was the South Sea Bubble and how did Sir Isaac Newton, one of the world’s most intelligent thinkers, fall for it? At the start of the 18th Century, the British Government’s debt was huge. To ease this burden, the government created the South Sea Company, by requiring investors to exchange their government debt holdings for South Sea stock. Much like ‘pump and dump schemes’ that we know of today, the company’s directors grossly inflated stories and hyped up the company so much that new investors saw impressive returns, such as Newton, whose first investment grew by 100%. It was at this point that he sold his stock, happy with his profit.
However, as the stock continued to rise, Newton became envious of those who were still invested. He became so envious, in fact, that he bought into the stock again, and put a larger amount of his wealth towards it. The South Sea Company achieved very little in terms of growth and in September 1720, the bubble finally burst, rendering many of its investors bankrupt.
What Can We Learn From This?
Although Sir Isaac Newton was more intelligent than most, he still made many common human errors. The first is FOMO (fear of missing out), which isn’t just applicable for not going out to the party; he saw everyone else enjoying the continued profits and felt that he shouldn’t have cashed out early. Herd mentality was another human error- quite often people will want to follow the crowd, and invest in an asset class because ‘everyone is talking about it’ or ‘everyone else is doing it’ (NFTs & Crypto ring a bell anyone?). He quite obviously ignored the red flags and practised ‘selective hearing’- remember this man co-created calculus; he should have known that the numbers weren’t adding up and this was a bubble soon to burst, but he ignored the warning signs.
The most fatal flaw arguably, was greed. People become excited at the thought of making money quickly, and unfortunately this is a driving factor in people making poor investment decisions. He did not take the emotion out of investing, and succumbed to greed. If you can put your emotions aside, you can actually become a better investor than Sir Isaac Newton.
Investing for Singapore Expats 