The South Sea Bubble

‘What goes up must come down’. We all remember from our school days Sir Isaac Newton for his famous law of gravity and the picture of the apple falling on his head.

Sir Isaac Newton was a genius mathematician who had an input into many aspects of life in this country at the end of the 17^th and beginning of the 18^th century.

So what prompted him to state “I can calculate the motions of heavenly bodies, but not the madness of people”?

During Sir Isaac Newton’s lifetime a financial event took place that was famously known as the South Sea Bubble. Earlier in 1711 The South Sea Company was formed. By 1720 this had developed into the South Sea Bubble, the market was flooded with a whole variety of brand new ventures, some of which were so secret that they could not inform the investors what they were investing in. This only aided the speculative frenzy to increase even further. Speculation became rampant as the share price kept skyrocketing. It was thought that this company “could never fail”.

Few could avoid the promises of quick easy riches.

Well Sir Isaac Newton was not immune to what was happening around him. He invested early in the South Sea Bubble and had the good fortune of making a large profit by selling early, which despite being relatively wealthy already was important to him. He had invested early and then got out relatively early.

However he then watched friends and colleagues around him continuing to invest and becoming ever richer as the investments continued to rise in value.

Sir Isaac Newton then made his biggest error of judgment. He could not stay out of the market, so back in he went. However to make up for lost time he invested substantially more of his monies, some of which he had also borrowed.

This time he invested just as the bubble burst. Investor confidence soon began to wane, the sell-off quickly followed in July of 1720 which then became a collapse and by September the share price had completely plummeted, devastating institutions and individuals alike, including Sir Isaac Newton who financially lost a large amount of his wealth.

Therefore we discover that even a genius mathematician like Sir Isaac Newton could not predict the stock market, nor could he avoid being succumbed by greed. As Sir Isaac Newton learned, we are affected by the basic elements of human psychology – fear and greed, especially when it relates to our finances.

If you would like to benefit from our professional help in effectively managing your investments and strategy in the current climate, please do get in touch on 01626 833225