What goes up

Sir Isaac New­ton meets the mar­ket

Arkansas Democrat-Gazette - - EDITORIAL PAGE - Paul Green­berg

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 fis­cal 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 of times. 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 New­ton’s 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 Sir Isaac 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.

Paul Green­berg is the Pulitzer Prize-win­ning edi­to­rial writer and colum­nist for the Arkansas Demo­crat-Gazette.

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