In a new essay published on GoldSeek, David Russell, CEO of the Dublin-based precious-metals dealer GoldCore, revisits Sir Isaac Newton's losses in the South Sea Bubble of 1720 to examine why experienced, knowledgeable investors are repeatedly drawn into speculative manias — and why selling a winning position can prove emotionally harder than buying one.

The piece forms part of "What We Trust: Six true stories about money, ownership and survival," a six-part GoldCore Friday Read series that uses episodes from financial and social history to explore what money is, what ownership means, why intelligent people speculate, where wealth becomes safe, and what investors are ultimately trying to preserve. Readers can follow the series' remaining instalments as the Friday Read continues.

Newton sold too soon — then bought back too late

In the spring of 1720, Russell writes, Newton did something that has become almost as infamous as the descending apple: he sold too soon. Newton had acquired shares in the South Sea Company before their spectacular rise. As enthusiasm grew, he sold much of his position and secured a handsome profit — a rational and prudent decision, in Russell's assessment, given that the price had risen dramatically and the value promised by the company was becoming increasingly difficult to justify.

The "very human, fallible" Newton then watched other people continue to get richer and began to experience what younger generations call FOMO — a phenomenon Russell is inclined to call "Seller's Remorse." He returned to the market at much higher prices, and when the South Sea Bubble collapsed later that year, he suffered substantial losses.

Estimates of Newton's losses vary widely across popular retellings, from £10,000 to £20,000 — roughly £1.8 million to £3.6 million in today's money — but surviving records show the usual sequence, Russell notes: early participation, a profitable exit, and a costly re-entry as the crowd's success became harder to ignore.

A veteran of the monetary system

This was not, Russell emphasizes, a case of a brilliant scientist wandering innocently into a subject he did not understand. Newton was an experienced veteran of the monetary system: he had been Warden and then Master of the Royal Mint since the 1690s. He had pursued counterfeiters, helped administer the Great Recoinage, and advised on the value of the guinea. That advice — his 1717 valuation fixing the guinea at 21 shillings — is widely credited with nudging Britain onto a de facto gold standard, made formal in 1821 and maintained, in various forms, into the twentieth century, which gives the essay's title a literal edge: the man who could not read the crowd had, in his official capacity, helped set the price of gold itself. Few investors in the eighteenth century understood coinage, public finance, and the institutional machinery of money better. Yet despite all that experience, Russell writes, Newton was still human and could not remain indifferent to everyone else's apparent good fortune.

The South Sea Company itself was bound up with Britain's public debt and possessed trading privileges connected to Spanish America. Chartered in 1711, it moved to the centre of London finance in early 1720, when Parliament accepted its plan to convert a large slice of the national debt into company stock; shares that began the year at just over £100 were trading near £1,000 by midsummer. Speculative mania ran on both sides of the Channel that year — John Law's Mississippi scheme in Paris was collapsing almost exactly as the South Sea share price peaked in London. The company's prospects were presented with an optimism far beyond what political and commercial reality could ever have delivered. Inevitably the shares rose, success attracted attention, and that attention brought more demand. Prices were no longer the result of a sober assessment of future earnings; they became evidence, in themselves, that sceptics were missing something.

How bubbles recruit intelligent people

This is not an old-fashioned concept, Russell writes — it is still how bubbles recruit intelligent, experienced people today. Bubbles rarely require investors to believe something obviously ridiculous or hyped up at the beginning. Instead, the beginning is usually a plausible step in the company's plan: perhaps a new trading opportunity, a transformative technology, a scarce asset, or a favourable change in management. The story may well contain a great deal of truth, and the investor's error arises when they assume that no price can become too high for that truth.

Newton's experience also reveals why selling can be emotionally harder than buying, Russell argues. Once he had sold, he no longer merely observed the rising market; its rise made him feel as though he had made a loss, because he was inclined to contemplate the wealth he might have possessed rather than what he did possess. Every further increase in the share price made his prudent decision feel more like a personal failure, and the FOMO worsened.

Economists call this opportunity cost, but Russell finds the clinical phrase fails to capture the irritation Newton felt from watching a neighbour profit from the risk he had declined to take. Envy transforms somebody else's gain into imagined evidence of one's own loss, even when one's capital is intact and the original decision was sound. The tendencies Russell describes have long had names in behavioural finance: regret aversion and herding, the "disposition effect" documented by Hersh Shefrin and Meir Statman in 1985 — the observed tendency to sell winners too early and ride losers too long — and, beneath them, prospect theory, Daniel Kahneman and Amos Tversky's 1979 account of why felt losses loom larger than equivalent gains. Russell's "Seller's Remorse" belongs to the same family of biases.

When intelligence becomes a disadvantage

Oddly, Russell suggests, this may be precisely where intelligence becomes a disadvantage. A clever investor is often capable of cultivating an excellent explanation for doing what emotion already wants to do. As new facts are discovered, the otherwise intelligent investor chooses to refine the thesis, and a higher valuation is then justified because circumstances are said to have changed — when what looks like fresh analysis may in fact be regret wearing rose-tinted glasses.

The lesson, Russell writes, is not that investors should ignore rising markets or refuse to reconsider a decision. Sometimes an asset continues to rise because the original assessment was wrong, and intellectual honesty requires the possibility of changing one's mind. The harder task is to distinguish reconsideration from capitulation. Russell poses two questions: Has the evidence changed, or has the price simply become emotionally persuasive? Is the position appropriate to the investor's objectives, or is it an attempt to erase the discomfort of having missed an earlier gain?

Rules, purposes and the precious metals market

This is one reason a written set of investment rules — or even an investment purpose — is so useful, Russell writes. An asset acquired for speculation should have rules governing position size, valuation and exit. An asset held for insurance or long-term preservation should not be judged solely by whether it outperformed the most fashionable market over the previous twelve months. The muddle, stress and confusion in investment decisions arise when an investor buys for one reason and monitors for another.

Russell notes that this pattern appears often in the precious metals markets, especially among those who bought or sold near a notable price level. During a rapid rise, people who previously dismissed the metal as inert may buy because it is performing; during a decline, people who bought it as long-term insurance may sell because it has stopped performing. In both cases, it is the price that has persuaded the owner to rewrite the purpose of the asset after the decision has been made.

This is not to say one should hold gold regardless of valuation, circumstance or need, Russell cautions. It simply means that price is not a substitute for the asset's role. A family holding bullion as part of a diversified reserve is making a different decision from a trader attempting to profit from next month's move, even if both appear in the market on the same day.

A lesson from history

Newton's mistake was not a lack of information, Russell concludes. Few investors in eighteenth-century Britain could have brought more analytical ability to the question of money. Rather, his difficulty came from the challenge of remaining faithful to a sound decision while a crowd appeared to disprove it.

Whether or not Newton really said, shortly after his loss, "I can calculate the motion of heavenly bodies, but not the madness of people," he clearly saw that even a person who understood value could be drawn back by price, Russell writes. Markets will always provide examples of somebody becoming richer more quickly, he adds, but their success must not be allowed to dictate what we do with our own wealth.

About the author

David Russell is the CEO of GoldCore. Until Summer 2023 he was Director of Marketing and Communications, responsible for all marketing and communications strategies and branding. He joined GoldCore in 2008 as Director of Business Development and later took over as Director of Marketing and Communications in 2020. Prior to this, he managed and operated his own marketing agency and completed multiple coaching qualifications.

"Working for GoldCore gives you a fantastic lens through which to view global financial and geopolitical developments. I am very proud to be part of a company that contributes to increasing investors understanding of these developments," Russell writes.

Outside of work, Russell is passionate about sailing and has completed the Round Ireland Yacht Race twice.

Source: GoldSeek — https://goldseek.com/article/isaac-newton-could-price-gold-not-crowd