Authored by Rahul Setty
Isaac Newton is widely regarded as one of the most renowned figures in math and science, for his three laws of motion altered our understanding of inertia, acceleration, and action/reaction. What few recall about Newton is his exemplification of the notion that even the most intelligent of individuals can succumb to the vicissitudes of human emotion.
The story dates back to the 1700s, when the British-based South Sea Company was founded as a government-created arm to reduce the national debt. In exchange, they earned a monopoly on trade with Spain-owned territory in South America. After King George assumed governance of the company in 1718, the company's value began to increase significantly. Speculation-fueled frenzy ensued, and the company eventually began to trade its own stock to pay off the debt it had assumed. Newton recognized this bubble forming, and exited with a handsome profit in spring 1720. Later that fall the bubble burst, and despite being realizing the tenuous circumstances he found himself in, Newton could not resist temptation, re-entered the stock at a higher price, and lost roughly three times what his original profit.
"I can calculate the motions of the heavenly bodies, but not the madness of people." -Sir Isaac Newton, on the South Sea Bubble
Sir Isaac Newton, a brilliant scholar and a top 99.99999% mind in human history, directly lost a substantial sum of money due to a deep-rooted greed that he could not wrangle.
The Stomach Is The Hardest Part
The reality is, anyone in that era could have realized the extraordinary circumstances surrounding a stock rising hundreds and hundreds of percent without any fundamental basis and ascertained an issue. The same goes for the 2020-2021 ZIRP-fueled bubble, the late 1990s Dotcom bubble, or the Nifty Fifty bubble of 1973-1974. History rhymes. Human behavior tends to mirror one another, and when we compare ourselves to others instead of focusing on our own process, we make suboptimal decisions out of envy and desperation to 'catch-up' to others' short-term success. In investing and in life, consistent success comes from following a first-principles approach. That entails thinking for oneself rather than relying solely on the 'wisdom' of the crowd, understanding what and why a particular security is owned, and understanding that true business outcomes occur on a long-term time horizon. It also means sticking to convictions through intense share-price volatility for a quality business that continues to execute. Our portfolios are a business of owning businesses, and time is the friend of the resilient business. The market has a way of serving humble pie to those who aim to cheat time. As Newton discovered, every action has an equal and opposite reaction.
