How Isaac Newton Went Flat Broke Chasing A Stock Bubble

Tyler Durden's picture

Submitted by Tim Price of Sovereign Man blog,

For practitioners of Schadenfreude, seeing high-profile investors losing their shirts is always amusing.

But for the true connoisseur, the finest expression of the art comes when a high-profile investor identifies a bubble, perhaps even makes money out of it, exits in time – and then gets sucked back in only to lose everything in the resultant bust.

An early example is the case of Sir Isaac Newton and the South Sea Company, which was established in the early 18th Century and granted a monopoly on trade in the South Seas in exchange for assuming England’s war debt.

Investors warmed to the appeal of this monopoly and the company’s shares began their rise.

Britain’s most celebrated scientist was not immune to the monetary charms of the South Sea Company, and in early 1720 he profited handsomely from his stake. Having cashed in his chips, he then watched with some perturbation as stock in the company continued to rise.

In the words of Lord Overstone, no warning on earth can save people determined to grow suddenly rich.

Newton went on to repurchase a good deal more South Sea Company shares at more than three times the price of his original stake, and then proceeded to lose £20,000 (which, in 1720, amounted to almost all his life savings).

This prompted him to add, allegedly, that “I can calculate the movement of stars, but not the madness of men.”

20131210 image How Isaac Newton went flat broke chasing a stock bubble

The chart of the South Sea Company’s stock price, and effectively of Newton’s emotional journey from greed to satisfaction and then from envy and more greed, ending in despair, is shown above.

A more recent example would be that of the highly successful fund manager Stanley Druckenmiller who, whilst working for George Soros in 1999, maintained a significant short position in Internet stocks that he (rightly) considered massively overvalued.

But as Nasdaq continued to soar into the wide blue yonder (not altogether dissimilar to South Sea Company shares), he proceeded to cover those shorts and subsequently went long the technology market.

Although this trade ended quickly, it did not end well. Three quarters of the Internet stocks that Druckenmiller bought eventually went to zero. The remainder fell between 90% and 99%.

And now we have another convert to the bull cause.

Fund manager Hugh Hendry has hardly nurtured the image of a shy retiring violet during the course of his career to date, so his recent volte-face on markets garnered a fair degree of attention. In his December letter to investors he wrote the following:

“This is what I fear most today: being bearish and so continuing to not make any money even as the monetary authorities shower us with the ill thought-out generosity of their stance and markets melt up. Our resistance of Fed generosity has been pretty costly for all of us so far. To keep resisting could end up being unforgivably costly.”

Hendry sums up his new acceptance of risk in six words: “Just be long. Pretty much anything.”

Will Hendry’s surrender to monetary forces equate to Newton’s re-entry into South Sea shares or Druckenmiller’s dotcom capitulation in the face of crowd hysteria ? Time will tell.

Call us old-fashioned, but rather than submit to buying “pretty much anything”, we’re able to invest rationally in a QE-manic world by sailing close to the Ben Graham shoreline.

Firstly, we’re investors and not speculators. (As Shakespeare’s Polonius counselled: “To thine own self be true”.)

Secondly, our portfolio returns aren’t exclusively linked to the last available price on some stock exchange; we invest across credit instruments; equity instruments; uncorrelated funds, and real assets, so we have no great dependence on equity markets alone.

Where we do choose to invest in stocks (as opposed to feel compelled to chase them higher), we only see advantage in favouring the ownership of businesses that offer compelling valuations to prospective investors.

In Buffett’s words, we spend a lot of time second-guessing what we hope is a sound intellectual framework. Examples:

  • In a world drowning in debt, if you must own bonds, own bonds issued by entities that can afford to pay you back;
  • In a deleveraging world, favour the currencies of creditor countries over debtors;
  • In a world beset by QE, if you must own equities, own equities supported by vast secular tailwinds and compelling valuations;
  • Given the enormous macro uncertainties and entirely justifiable concerns about potential bubbles, diversify more broadly at an asset class level than simply across equity and bond investments;
  • Given the danger of central bank money-printing seemingly without limit, currency / inflation insurance should be a component of any balanced portfolio
  • Forget conventional benchmarks. Bond indices encourage investors to over-own the most heavily indebted (and therefore objectively least creditworthy) borrowers. Equity benchmarks tend to push investors into owning yesterday’s winners.

In the words of Sir John Templeton,

“To buy when others are despondently selling and sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.”

So be long “pretty much everything”, or be long a considered array of carefully assessed and diverse instruments of value. It’s a fairly straightforward choice.

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ZH Snob's picture

and to think, he KNEW what goes up must come down.

hedgeless_horseman's picture

 

 

In the words of Janet Yellen,

"Gravity?  Pfffttttt."

alangreedspank's picture

A helmet ? I thought the bowl cut was one, or part of one anyways.

Four chan's picture

we have all been there done that..great minds and all that.

wintermute's picture

That whole bubble took only about a week to inflate and collapse.

Peter Pan's picture

That is not a helmet she is wearing. It is a fish bowl. Her brain swims around in circles unable to break out of the pattern of Central Bank interference.

BLOTTO's picture

I dont trust Newton nor Einstein...i wouldnt be surprised if they were a part of the inside club.

.

Smart mofo's? yes. But dont think science hasn't been hijacked as well with everything else. Modern science is corrupted too.

.

Nikola Tesla, imo, was the only one that wanted to make the world a better place for everyone, for free... thats why 'they' confiscated his most interesting, ie, world helping creations/formula's/patents and shut it out from the good people to see. Thats why he died poor - he didnt giveb a fuck about money...he really was on another level...or plane for that matter...

BLOTTO's picture

O'Brien : "We control matter because we control the mind, Winston. There is nothing that we could not do. Invisibility. You must get rid of those nineteenth-century ideas about the laws of Nature. We make the laws of Nature."

 
.
Winston: "But you do not! You are not even masters of this planet...the world itself is only a speck of dust. For millions of years the earth was uninhabited."


.
O'Brien : '"Nonsense. The earth is as old as we are, no older. How could it be older? Nothing exists except through human consciousness....


.
For certain purposes, of course, that is not true. When we navigate the ocean, or when we predict an eclipse... Do you suppose it is beyond us to produce a dual system of astronomy? The stars can be near or distant, according as we need them. Do you suppose our mathematicians are unequal to that? Have you forgotten doublethink?"

 ('1984')

 

jbvtme's picture

blotto...check out eric dollard and david wilcock. also, constable's work on ruth drown, steiner and reich (the cosmic pulse of life)

InTheLandOfTheBlind's picture

dollard might be one of the most interesting case studies of modern times in terms of inpractical genius... i don't know if it is outside sabotage or inside that gets him, but sabotage always seems to lurk nearby.... Konstanin Meyl (spelling) is another voice to check out... stay clear of bearden.

Four chan's picture

that guy facinates the shit out of me, i think ive watched 100 hours of him blowing my mind.

it aint easy's picture

You mean David Wilcock the con man? How's he doing now post 2012? I know he also made some "prediction" before 2000, then disappeared after nothing happened and resurfaced some years later with a new 2012 schtick.

Zero Point's picture

See also Victor Schauberger.

A true genius, who ended up pretty much like Tesla actually.

TwoCats's picture

Orwell might as well have written:

"The earth can be warming or cooling, according as we need it [ to impose taxes].  Do you suppose our dendrochronologists are unequal to that?"

stacking12321's picture

science has not, and cannot, be hijacked.

that which has has been hijacked, is not science.

science is merely application of the scientific method in pursuit of knowledge.

people who call themselves scientists can be corrupted, but not science itself - no amount of bribes can cause 2 plus 2 to equal 5, nor the sun to revolve around the earth.

Cursive's picture

@stacking12321

Wow, that's a naive statement. Reading that, I am reminded of the treatment of blowing smoke up the ass of drowning victims.  Look, if anything involves Man, it can and will be corrupted.

Variance Doc's picture

"...it can and will be corrupted."

Junked you for that.  As a Ph.D. mathematician and scientist, I can tell you there is a lot of work out there that is NOT corrupted and people who are not corruptable.  They come to the beauty of the material (like I did), not the money.

TwoCats's picture

Nobody's incorruptible, Doc.  We all face the same temptations to sacrifice intellectual honesty for some more immediate gain, be it money, fame, etc.  Under the wrong circumstances, anyone would succumb.  Usually they don't even recognize the moment they first comprimise their principles, but they know it later.

If I were you, I wouldn't put too much faith in my peers' integrity.  A good friend I would trust (that's almost the definition of a good friend), but for everyone else, verify.  The nice thing about science is it's all supposed to be verifiable.

Whalley World's picture

Of 50 Senators, only Barbara Boxer is working on Nuclear reform.  What about Fukushima, we are all getting blasted and what has science to say, sadly Sweet Fuck All!

fockewulf190's picture

Math and science advancements usually need to be replicated independantly, so you may earn 15 minutes of fame with a cheat, but your dogshit once you have been debunked.  When it comes to other fields of acadamia though, I believe you have a point.  Just ask the list of german politicians who were caught  plagiarizing their doctorate thesis forcing one resignation after the next.

Variance Doc's picture

Clearly you are not in any scientific field.  You really have *no* idea what you are talking about.  STFU.

On another note, it's really sad that ZH has become populated with morons.

Tall Tom's picture

Most have no idea on how we think, whether or not they publish on ZH, or elsewhere.

 

While it is true that some Scientists are corruptable the vast majority practice ethics.

 

It is just a matter of IQ, Doctor. Roughly 85% have IQs that are Normal and Below Normal. And since you are Third Sigma then you already know just how difficult it is to communicate with the vast majority.

 

Forgive them as they truly know not what they do.

Andre's picture

The ones I have dealt with seem prone to drinking a LOT of Koolaid.

Academic accomplishment is no guarantee of integrity, or even intelligence beyond the ability to parrot EXACTLY what your program advisor likes to hear. At this point much of the academic world is absorbed in grantsmanship - research that gets you paid better. And, of course, "publish or perish."

This was less the case some time ago, but it certainly is the case now. And, when you think of it, both Krugman and Bernanke are PhD's, and Janet Napolitano is on staff in the U Cal system. This rather belies your commentary that PhD'd are so - noble? upright?

Even smart?

Tall Tom's picture

Mathematicians and Physical Scientists are much less likely to violate the code of ethics than Economists or Politicians, those whom tenure deals with Politics..

 

Your anecdotal experiences are not a valid  justification for Gross Generalizations.

 

In Graduate School, before the degree is awarded, there are some whom will parrot their Academic Advisors. They tend to make mediocre Scientists at best and do not serve their advisors well by being Yes Men.

 

The ones whom excel are those whom challenge their advisor and surpass them.

 

I am more than aware of Departmental Politics but it is not as cut throat in Science Departments as it is in other Departments, and Colleges of the University Hierarchy.

 

Most Physical Scientists and Mathematicians do not compromise on principle. (Yes some do.) Not most.

Andre's picture

"Your anecdotal experiences are not a valid  justification for Gross Generalizations."

And where there is smoke there is generally fire.

Your replies to others have elements of assumed superiority. Sorry, that's just the way it comes off. I have seen a great deal of this, and it is the reason I tend to look at PhD's with skepticism. The ones I have met more recently have a fixation on their intellectual accomplishments that make them inflexible at best, almost medieval in their caste consciousness. It is interesting to watch - from a distance. Yet it does not do to get too close. I have also found the principles of which you speak may apply within the group, but ONLY within the group.

Cursive's picture

@Variance Doc

OK, whatever Captain America.  Do you believe in the infalability of Man?  You would have to if you think that "Science" cannot be corrupted.  Do you think the NTSB isn't political?  What about the CAFE standards for the auto industry?  Sure, in a base 10 system, 10 times 10 will always equal 100, but are you absolutely certain the HIV always leads to AIDS?  How do you explain bloodletting and the use of leaches in early medicine?  These are questions of "Science" and the answers have changed greatly over the years.

Its_the_economy_stupid's picture

Fact is incorruptible.  But, application of fact, interpretation of fact.....now, that's another ballgame all together.

Variance Doc's picture

Really?  NTSB, CAFE, HIV, and AIDS.  This is science?  You really don't get it, do you.

Do I really have to explain that the first one is a government agency, the second one is set by a government agency?  Where is the repeatable experiment in this "science"?

JFC, are you really that stupid?

 

ich1baN's picture

This is why you are a pseudo intellectual. You are only protecting your brand because it is your livelihood. 

If you think science is so incorruptible then why do we have things like ClimateGate? Why are there meteorologists that come and talk about how their department heads asked them to increase daily temperature ranges from their readings?

How about the million contrivances involved with evolution.... Hear of Piltdown man? How about Nebraska Man? This one is pretty hilarious as Nebraska man was a contrived neanderthal from a pig Nebraska Man was discovered in 1922 by Harold Cook in the Pliocene deposits of Nebraska.  A tremendous amount of literature was built around this supposed missing link which allegedly lived 1 million years ago.

The evidence for Nebraska Man was used by evolutionists in the famous Scopes evolution trial in Dayton, Tennessee, in 1925.  William Jennings Bryan was confronted with a battery of "great scientific experts" who stunned him with the "facts" of Nebraska Man.  Mr. Bryan had no retort except to say that he thought the evidence was too scanty and to plead for more time.  Naturally, the "experts" scoffed and made a mockery of him.  After all, who was he to question the world's greatest scientific authorities?

But, what exactly was the scientific proof for Nebraska Man?  The answer is a tooth.  That's right; he found one tooth!  The top scientists of the world examined this tooth and appraised it as proof positive of a prehistoric race in America.  What a classic case of excessive imagination!

Years after the Scopes trial, the entire skeleton of the animal from which the initial tooth came was found.  As it turns out, the tooth upon which Nebraska Man was constructed belonged to an extinct species of pig.

Ya, you pseudo intellectuals at colleges that are about to become an extinct species along with the rest of the bubble bursting in education..... if you can't recognize that the entire business of being a professor with recognition all depends on the amount of stuff you publish vs quality information, then you are apart of the same crowd that claims great scientific achievements from fraudulent work like ClimateGate and Nebraskaman. GTFO. 

Zero Point's picture

Let's not bring up the "science" of archaology hmmmm?

Too funny for words. Incorruptable lol.

PS The Great Pyramid is a tomb for Cheops.

Haha.

BLOTTO's picture

I respectfully disagree...

 

How do we really know for sure? We only know what they have taught us... they call it 'theories' for a reason.

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I believe we CAN go beyond the speed of light. 'They' (Einstein) tell us we cant because they dont want us dreaming or getting away from our enslavement on this tortured fucking planet...

Headbanger's picture

Then go do it and get the fuck outta here you wanker!

Sheesh!

jbvtme's picture

“If you want to find the secrets of the universe, think in terms of energy, frequency and vibration.” . Tesla
“If you only knew the magnificence of the 3, 6 and 9, then you would have a key to the universe.” Tesla

jbvtme's picture

which is how edward leedskalnin built coral castle

BLOTTO's picture

A cow, a rabbit and sheep all eat grass...yet one shits in patties, one shits in pellets and the other shits logs? And no one knows why.

.

Therefore since we dont know shit,

Science will and can NOT be able to answer everything. Its impossible. Only the illuminati with the help of the controlled main stream media would make you believe that everything has a scientific answer...

'Man', talk about conceited...

 

walküre's picture

Great example. Science cannot explain how we've come to be either. Scientific efforts to describe intelligent design are considered pseudo science when it should be funded and researched like nothing else. Instead we have politics and religion.

BLOTTO's picture

Tesla published a prepared statement on his 81st birthday (July 10, 1937) critiquing Albert Einstein's theory of relativity. The following is a portion of that statement:

"... Supposing that the bodies act upon the surrounding space causing curving of the same, it appears to my simple mind that the curved spaces must react on the bodies, and producing the opposite effects, straightening out the curves. Since action and reaction are coexistent, it follows that the supposed curvature of space is entirely impossible - But even if it existed it would not explain the motions of the bodies as observed. Only the existence of a field of force can account for the motions of the bodies as observed, and its assumption dispenses with space curvature. All literature on this subject is futile and destined to oblivion. So are all attempts to explain the workings of the universe without recognizing the existence of the ether and the indispensable function it plays in the phenomena."
"My second discovery was of a physical truth of the greatest importance. As I have searched the entire scientific records in more than a half dozen languages for a long time without finding the least anticipation, I consider myself the original discoverer of this truth, which can be expressed by the statement: There is no energy in matter other than that received from the environment." — Nikola Tesla

 

 

http://peswiki.com/index.php/PowerPedia:Tesla%27s_Dynamic_Theory_of_Gravity

 

NickVegas's picture

That is amazing, unbelievable. I'm serious, that quote made my day, and answered a few puzzles in my head. It becomes monstrous over time.

InTheLandOfTheBlind's picture

frequency in time, not angular frequency... it is all about the impulse currents... the real part of the imaginary exponential....  dollard is very clear on this... plus if you study laplace transforms enough you will see that driving an exponential system with a real (not imaginary/sinusodial) exponential, one gets interesting results...

jbvtme's picture

what did van tassel mean when he said soldana (the et from venus) told him: F=1/t

http://www.youtube.com/watch?v=wZbFsFWk__c

putaipan's picture

@ jbvt ... sounds like your a canidate for Marko Rodin and his vortex math. me? i'm the balken in the bentov/balken/baba model of the universe. later stolen by homer/hawking as the 'universe as a jelly filled donut" . damned science thieves!

Variance Doc's picture

"I believe we CAN go beyond the speed of light."

Idiot.  Do you even comprehend what science is?  Science is about falsifiable conjectures backed by replicable experiments.  We call them theories, simple because there could be an experiment tomorrow that, say, shows Einstein's General Theory is incorrect.  However, given the number of different confirmatory experiments carried out so far, it is *very, very* improbabile.  You need to STFU until you comprehend this.

The laws of Nature do not give a fuck about what you believe.

BLOTTO's picture

Sure we can, the Universe is millions of light years in girth - how else do you except one to traverse it? By going in knots? Or maybe steam power?

;)

.

P.S. Improbable does not = impossible.

So watch your mouth, and keep reaching for the st*rs...

 

TwoCats's picture

Such scientific profanity.  The speed of light limit might be breakable depending on the geometry of other dimensions, which theorists are still working on (they are hard to actually observe).  General relativity applies to the 4 dimensions with which we are familiar.

Further, recall that General relativity superceded Newtonian mechanics, which were undeniably correct ... until we dealt with scales that were too big, small, fast, or massive.  Newton's laws turned out to be a special case and an approximation, and it took centuries for science to advance to the next level.  Why do you think General Relativity is different?

Dr. Acula's picture

"The speed of light limit might be breakable"

It is, in a way. Galaxies already move apart at speeds greater than that of light.

You just have to make the space itself move: http://en.wikipedia.org/wiki/Alcubierre_drive

 

InTheLandOfTheBlind's picture

angular velocity of an electron (if they exist) has been measured (more likely derived) to be faster than the speed of light... just something to ponder... i am still not sold on the electron since maxwell's equation were derived with out its concept

BurningFuld's picture

Riddle me this. You have two objects you send them off in two opposite directions each going at 3/4 the speed of light. Now put yourself on one of those objects.

You will now note that the other object is going away from you at faster than the speed of light.

Can you "see" it ? Or even know that it exists?

BLOTTO's picture

Good discussion, even if we went on a tangent.

.

I would rather to talk to loyal strange ZedHeds about heavy deep topics, then to talk to my friends about nonsense.

.

But to make a claim that 'i think we can go beyond the speed of light' is really not that out of the question. Why, because Einstein said its not possible? Fuck Einstein...Mileva Maric was smarter then he was anyway:)

.

Also its easy to explain and prove that 2+2=4, that is why we teach addition to 4 year olds. And then we teach theories of evolution, major scientific claims, etc to adults because most will just accept it as fact like we did when we were 4.

Look 2+2=4 and btw, we evolved from monkeys then flew to the moon using a comodore 64 in 69.lol

 

akak's picture

 

You have two objects you send them off in two opposite directions each going at 3/4 the speed of light. Now put yourself on one of those objects.

You will now note that the other object is going away from you at faster than the speed of light.

No, in fact it does not work that way at all, as Einstein's General Relativity and many empirical observations both demonstrate. 

It is counterintuitive, but what an observer standing on one of those two objects would see is the other object moving away at some small fraction of a percent less than the speed of light.  And it does not matter at what arbitrarily large fraction of the speed of light you make the two objects move away from each other --- they will still be observed, by outside observers AND by each other, to move away from each other at some tiny fraction of a percent less than the speed of light.