Isaac Newton: The Genius and the Crowd

The South Sea Company was founded in 1711 to help manage Britain’s government debt. It also held exclusive trading rights in parts of the Americas, including involvement in the trade in enslaved Africans. But its main financial role was collecting government payments and passing them to investors.⁴

In 1720, the company proposed to take over a large part of Britain’s national debt. People who held government bonds were invited to exchange them for South Sea shares. For the government, this promised lower interest costs. For bondholders, it offered shares in a company whose price was rising. For the company, it created a powerful incentive. The higher its share price, the fewer new shares it needed to hand each bondholder, and the more shares were left over for the company to sell for cash.⁴

In other words, the company profited most when its own stock was expensive. That set up a loop. A rising price made the conversion more profitable. A more profitable conversion seemed to justify a higher price. New buyers saw the rising price and wanted to participate, even though higher prices did not necessarily mean the company would make more money.

The company made it easier to speculate. It offered new shares on installment, allowing buyers to commit to a purchase before paying the full price.⁵ That made participation easier, while leaving buyers exposed to later payment demands.

Newton had been a South Sea shareholder before the mania. Odlyzko’s reconstruction, based on surviving records, suggests he owned at least 100 shares, mostly bought at prices of 100 or below. At the start of 1720 the stock traded around 130.⁶

Then the price began to run, and in April, Newton sold. He issued instructions to sell 30 shares on April 19 and 70 more on April 23. Odlyzko estimates his profit at around £20,000, a very large sum for the time.⁷

Nothing in the record tells us what Newton was thinking over the following weeks. What the record does show is what he did. He put the proceeds into government bonds, and then into South Sea stock again. He bought mostly in mid-June, when the price was near its peak. And as the price started to fall, he kept buying, until nearly all his financial assets were in that single company.⁸

By September, the bubble had broken. As prices fell, buyers facing installment obligations or loans came under pressure to find cash. Some sold into a falling market, adding to the decline. The same loop that drove the price up now drove it down.

Newton’s net worth, by Odlyzko’s estimate, fell by roughly £10,000. An anecdote recorded after his death put the loss at £20,000. Odlyzko considers the larger figure plausible, depending on whether you count the profit Newton could have kept.⁹

You may have seen a famous line attributed to Newton: that he could calculate the motions of the heavenly bodies, but not the madness of people. It is a wonderful sentence. It is also not reliably documented, and we don’t present it as something he said.¹⁰

What we can say is that Newton’s mistake was not ignorance. He understood the stock well enough to sell it at a profit. The mistake came afterward, when the price kept rising without him. Watching a gain you gave up keep growing is one of the most uncomfortable feelings in investing, and it pushes people to buy back in at exactly the moment the risk is highest.

He made a second mistake on top of the first. He didn’t just buy back in. He concentrated nearly everything he had in one stock, so that a single collapse decided his whole financial position.

Newton recovered. Over the following years he moved about half of his holdings into Bank of England stock, and he died a wealthy man.¹¹ His story became famous not because it ruined him, but because it showed that the most rigorous mind of his century was not immune to the crowd.