“Investors Have Been Making the Same Mistake for 300 Years” (The Atlantic) is an interesting article by Thomas Levenson, teacher of science writing at MIT.
Excerpts:
Already [in 1720] a wealthy man, Newton was usually a cautious investor. As the year began, much of his money was tucked away in various kinds of government bonds—reliable, uneventful investments that delivered a regular stream of income. He did own shares in a few of the larger companies on the exchange, including South Sea, but he had never been a rapid or eager market trader.
That had changed in the past few months, though, as he bought and sold into the rising market seemingly in the hopes of turning a comfortable fortune into an enormous one. By August, he’d unloaded most of his bonds, converting them and other assets into South Sea shares. Now he contemplated selling the rest of his bonds to buy still more shares.
He did sell nearly all of them. It was a disastrous choice. Within three weeks, the market turned. By Christmas, it had utterly collapsed. Newton’s losses reached millions of dollars in 21st-century money.
Even someone smart enough to steal credit for being the first to invent calculus was not smart enough to resist the Vegas-style appeal of the stock market.
I recommend this article, a rare break in the continuous stream of Trump-hatred from the Atlantic (owned by someone smart enough to have sex with a rich guy, thus illustrating a much more reliable path to wealth than trying to beat the S&P 500).
Related:
He also dabbled in alchemy and occultism.
Lots of people who are smarter than average perform worse than average in the financial markets in part because they think that because they understand the logic of e.g., engineering, physics, mathematics or medicine they also understand the logic of financial markets and in part because they don’t have the necessary temperament and self discipline.
It’s gambling, a very different kind of logic. Also a place where emotion is your worst enemy.
Phil:
The bulk of evidence indicates that Leibnitz and Newton developed ideas on systematizing calculus methods independently. If anything there is slight but not convincing evidence indicating just the opposite: Leibnitz might have borrowed some ideas from Newton. So, I am not sure that “Newton stealing the credit” is a fair assessment of what might have happened. Besides, it just does not matter who”was the first”, the calculus ideas had literally been in the air for hundreds of years if not more with Bonaventura Cavalieri probably the closest to what N/L did in the sense of formalizing calculus methods.
It is interesting that both N & L chose to use the nebulous notion of infinitesimals as foundational part of the language rather than limits in their endeavors. Until Cauchy, calculus methods were sitting on rather shaky foundation of fluxions/infinitesimals that had caused some folks not possessing N&L kind of intuition often produce nonsensical results. The infinitesimals were put in order as late as in 1974 by Robinson, but it turned out that they do not possess any operational advantages in comparison to limit based foundations although they may be more appealing intuitively to engineers.
As far as I remember what I’ve read is that Newton did not want people to believe that ideas on systematizing calculus methods were developed independently. He wanted the world to believe that he was the one and only. He wanted credit exclusively.
Stephen Hawking, from A Brief History of Time:
Articles appearing in defense of Newton were originally written by his own hand – and only published in the name of friends! As the row grew, Leibniz made the mistake of appealing to the Royal Society to resolve the dispute. Newton, as president, appointed an “impartial” committee to investigate, coincidentally consisting entirely of Newton’s friends! But that was not all: Newton then wrote the committee’s report himself and had the Royal Society publish it, officially accusing Leibniz of plagiarism. Still unsatisfied, he then wrote an anonymous review of the report in the Royal Society’s own periodical. Following the death of Leibniz, Newton is reported to have declared that he had taken great satisfaction in “breaking Leibniz’s heart.”
The Atlantic explained that Newton lost his shirt in the stock market because a lack of government regulations.
“Since 2017, the Trump administration has been systematically dismantling even the modest market guardrails that were put in place after the previous crash.”
Trump made me write this comment. Now watch as Trump makes me eat another Danish cake.
The author may get his history of Newton right. But his argument that regulations prevented subsequent investors from catastrophically losing money is ridiculous.
He argues, with no evidence, that subsequent crashes occurred because regulations were allowed to lapse. His premise, that regulations prevent crashes, is false.
For just one counterexample, consider FNMA and FHLMC. They were the most regulated financial institutions in the country in 2008. And they were among the first to go insolvent in the crisis.
@philG –
would you update the article for 2020? Has your analysis significantly changed in the age of corona?
Interestingly there were at least 5 tech companies on the front page of hacker news with S1 filing.
Philip’s article on investing was excellent, no-nonsense straight talk. Definitely worth $100,000 in financial consultants’ advice. An update to his article has to be worth at least $50,000. Disevad, why don’t you give Phil the first $1000 of that payment for the article update?
Bill: Professor Malkiel’s advice is yet better and his book is available for free at the library!
At the risk of pointing out the obvious, there is currently a very real risk to being in cash or bonds. Inflation. And with the way the Fed is printing money, the risk is real. Warren Buffett has been cautioning against bonds for years.
I remember buying some Ariba on various mentions you made about it back in the day… didn’t turn out so well although i guess their product is still around?
I don’t remember ever saying that Ariba was a good investment! Nor did I buy any stock in the company. I did buy some stock in co-location companies because I used and admired their services. Of course, those investments collapsed in 2000! As with hard drives, airlines, and a bunch of other industries, the market expanded just as people expected, but so much money was invested in building capacity that the return on investment was unspectacular.