Are you surprised by the heading of this blog? You read that right. The great mathematician, physicist, astronomer, scientist Sir Isaac Newton lost millions in his one stock market investment. And yes, the loss was completely avoidable. We will go a step ahead and say that this is the most important lesson in behavioral finance. So are you curious to know exactly what happened? Allow us to demonstrate:
In the early 1720s, Sir Isaac Newton invested in a stock called South Sea Company. After almost doubling the investment in a matter of 6 months Newton exited the stock happily. The real problem starts here. Even though, Newton has sold off his position in the South Sea. His friends continue to hold it and they made more profit than him. Looking at this, Newton again bought the shares of South Sea Company. But only this time his buying price was more than 3 times the earlier purchase value. After he enters the stock again, the bubble of the South Sea Company Burst and stock price came down drastically. Newton lost his entire life savings in this fall.
This led to his famous saying, “I can calculate the movement of stars, but not the madness of men.” After this horrible experience, no one was allowed to utter the words South Sea near Sir Isaac Newton.
But, Why Did He Make Such A Big Mistake That Resulted in Millions Of Losses?
As we mentioned earlier this is the Behavioral finance lesson every investor needs to take. Newton was perfectly happy doubling his money in the stock. He entered again because he was experiencing Fear of Missing Out or FOMO. Just because his friends made more money, he thought he could too. But he did not apply logic to his decision. If the extremely genius scientist can make this mistake then anyone can.
Here Are The Lessons We Need To Take From Sir Isaac Newton’s Mistakes:
- Listen to other people but obey your own conscience – Just because your friends or colleagues or relatives have invested in a particular stock, does not mean it is a good buy. Do not give in to peer pressure when it comes to hard-earned money. Do your own due diligence before buying any stock. If you are not able to do that, take the help of a professional. But only invest if you are 100% convinced.
- Not every rising stock is a good buying opportunity – Sometimes, Fundamentally weak stocks do extremely well before they start falling. Taking a decision simply based on stock price will be extremely harmful to your portfolio. If you wish to invest for long term, a thorough fundamental analysis is a must before investing in any stock. Remember, stock price does not always reflect the quality of the company.
- Lastly, do not be a sore loser. Learn from your mistakes – Newton banned everyone around him from saying the words South Sea. Since he could not deal with his losses, he took this extreme decision. But one wrong decision does not define the entire market. We have seen many investors with bad experience blaming the markets and scaring away new investors saying stock market is a gamble. Stock markets are not a gamble but they are a great place to make money. Do not let small losses discourage you. Learn from your mistakes and build a portfolio that is fundamentally strong.
Investing in stock markets is all about probabilities. You should take steps to increase the probability of profit. You do not need high IQ to make profits in stock market. All you need is discipline, patience and control on your emotions.