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Bubbles (comparison years 1721 versus 2000)

Bubbles (comparison years 1721 versus 2000)
South Sea Stock versus NASDAQ-Comp.

Bubbles can hit anyone! 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...

Soth Sea Stock (Sir I. Newton), 1718-1721

...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.

(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)

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.

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 Newton to add, allegedly, that:
"I can calculate the movement of stars, but not the madness of men."

The quote (in the BUBBLE ;-) above is very often attributed to Mark Twain, but the earliest published source yet located is by Joseph Anthony Wittreich in Feminist Milton (1987) where he writes: "History may not repeat itself but it does rhyme, and every gloss by a deconstructionist need not be a loss, pushing us further into an abyss of skepticism and indeterminacy."

But here, after 270 years, all the people in the world didn't learn anything out of all the speculation-bubbles before. The Nasdaq-Composite continued to soar into the wide blue yonder (not altogether dissimilar to South Sea Company shares).

extract from "How Isaac Newton went flat broke chasing a stock bubble":