Why the Brilliant Scientist Isaac Newton Lost Money in the Stock Market

Isaac Newton was one of the greatest scientists in human history. He developed the law of universal gravitation, which helped explain everything from why an apple falls to the ground to why planets orbit the Sun. He also established the laws of motion and made important contributions to mathematics and optics. However, even this brilliant scientist made a serious mistake when investing in stocks. To understand his story, we need to travel back about 300 years to Britain. In 1711, a company called the South Sea Company was established in Britain. At the time, the British government had accumulated large debts from wars and other expenses. The South Sea Company agreed to take on government debt in exchange for special trading privileges. The company hoped to make enormous profits by trading with Spanish colonies in the Americas. Part of its business involved forcibly transporting enslaved Africans and selling them into slavery. The South Sea Company attracted investors not only because of its potential trading profits but also because of its special relationship with the British government. People believed the company would become extremely profitable, so they began buying its shares. A share of stock represents partial ownership of a company. Investors can make money if a company grows and its stock price increases. However, they can also lose money if the stock price falls. In 1720, the South Sea Company's stock price began rising at an extraordinary pace. Shares that traded in the low hundreds of pounds early in the year climbed to around £1,000 within a few months. Early investors made large profits, and news of their success encouraged more people to buy shares. At first, investors were interested in the company's future. But as the stock price continued rising, many became more interested in the rising price itself. Some investors did not carefully examine how much money the South Sea Company could actually earn. They simply assumed that because the price had been going up, it would continue to rise. As stories spread about people making fortunes, even more investors entered the market. The growing demand for shares pushed prices higher. When the price of an asset rises far beyond what its underlying value can reasonably support, this is known as an asset bubble. The name comes from the way a soap bubble expands before eventually bursting. Newton was among the investors who owned shares in the South Sea Company. He was not only an accomplished scientist but also an important official at the Royal Mint, and he had invested in financial assets for many years. As the South Sea Company's stock price climbed, Newton sold a substantial portion of his shares and made a profit. Up to this point, Newton's investment had been successful. He had owned shares at lower prices and sold them after their value increased. However, the South Sea Company's stock price continued rising even after Newton sold his shares. For someone who had already sold, this could be frustrating. If he had waited a little longer, he could have made even more money. Newton eventually appears to have bought shares in the South Sea Company again. The problem was that the price was now much higher than before. Many investors were extremely optimistic about the company's future, and its stock had already experienced an enormous increase in value. But the rapid rise did not last. The South Sea Company's actual trading profits failed to live up to investors' expectations. As concerns grew that the stock had become excessively expensive, more people began trying to sell their shares. During the second half of 1720, the stock price collapsed. Shares that had once traded at around £1,000 fell into the hundreds and eventually reached the low hundreds of pounds by the end of the year. Investors who had purchased shares at high prices suffered enormous losses. Newton is also believed to have lost a substantial amount of money during the collapse. It is often said that he lost approximately £20,000, but the historical transaction records are incomplete, so the exact amount remains uncertain. Why would someone as intelligent as Newton make such a mistake? We do not know exactly why Newton decided to buy the shares again. However, the South Sea Bubble illustrates how strongly human emotions can influence investment decisions. When people own a stock and its price falls, they often worry about losing money. But when they do not own a stock and its price keeps rising, they may worry about missing an opportunity to make money. These feelings can become especially powerful when they hear stories about other people becoming wealthy. This fear is commonly called FOMO, or Fear of Missing Out. When investors are influenced by this feeling, they may buy stocks without properly researching them or pay much higher prices than they originally intended. Of course, a sharp increase in a stock's price does not necessarily mean there is a bubble. Some companies genuinely grow rapidly, and their stocks become more valuable as their businesses expand. What matters is not simply how much a stock's price has increased, but whether the company's actual business and future earnings can support that price. Even an excellent company can be a poor investment if its shares are purchased at an excessively high price. The quality of a business and the price paid to own part of that business are two different things. Newton's experience demonstrates that intelligence and knowledge do not guarantee success in the stock market. Understanding scientific laws is different from predicting an uncertain future. Even exceptionally intelligent people can be influenced by popular enthusiasm and their own emotions. More than 300 years have passed since the South Sea Bubble, but similar events still occur today. Excitement about new technologies or industries can cause related stock prices to rise rapidly. When expectations become too optimistic, those same prices can fall sharply. Ultimately, Newton's investment experience teaches us that the smartest person does not necessarily win in the stock market. When investing, understanding what company you are buying and how much you are paying for it matters more than how much money everyone else appears to be making.