What We Trust
Six true stories about money, ownership and survival
A six-part GoldCore Friday Read series using true episodes from financial and social history to explore what money is, what ownership means, why intelligent people speculate, where wealth becomes safe and what we are ultimately trying to preserve.
In the spring of 1720, Sir Isaac Newton did something that has become almost as infamous as that 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. No shame there, it was a very rational and prudent decision. After all, the price had risen dramatically and the value promised by the company was becoming increasingly difficult to justify.
But then the very human, fallible Newton watched other people continue to get richer and so he began to get what the youth today call FOMO. I might be inclined to call it 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. The precise total of his losses varies wildly from £10,000 – £20,000 (£1.8m – £3.6m, today) across popular retellings, but surviving records show the usual sequence: early participation, a profitable exit and a costly re-entry as the crowd’s success became harder to ignore.
This was not 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. Safe to say that he understood coinage, public finance and the institutional machinery of money more than most investors in the 18th Century.
But, despite all that experience he was still human and he still could not remain indifferent to everyone else’s apparent good fortune.
The South Sea Company was bound up with Britain’s public debt and possessed trading privileges connected to Spanish America. Its prospects were presented with an optimism far beyond what political and commercial reality could have ever brought to reality. 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 and became evidence, in itself, that sceptics were missing something.
This is not an old fashioned concept, still to this day this is how bubbles recruit intelligent, experienced people. They so rarely require investors to believe something obviously ridiculous or hyped up at the beginning. Instead the beginning is usually about a plausible step in the company’s plan: perhaps it’s 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, but the investor’s error comes about 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. Once he had sold, he no longer merely observed the rising market, instead the market’s rise made him feel like he had made a loss because he was inclined to observe 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 that’s a clinical phrase that really does not capture the irritation Newton felt from watching a neighbour profit from the risk one declined to take. Envy transforms somebody else’s gain into an imagined piece of evidence of our own loss, even when our capital is intact and our original decision was sound.
Oddly this might just be where intelligence can become 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 an otherwise intelligent investor will choose to refine their thesis. And then a higher valuation is justified because circumstances are said to have changed, but really what looks like fresh analysis may be regret wearing rose tinted glasses.
The lesson 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, you must be open to the fact that Intellectual honesty requires the possibility of changing one’s mind.
You have to take on the harder task which is to distinguish reconsideration from capitulation. So ask yourself, 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?
This is one reason a written set of investment rules, or even an investment purpose, is so useful. 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 when making investment decisions comes about when an investor buys for one reason and monitors for another.
We often see this in the precious metals markets, especially amongst those who bought or sold near a notable price level. During a rapid rise, people who previously dismissed it 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 that one should hold gold regardless of the valuation, your circumstance or your need. 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 the trader that is attempting to profit from next month’s move, even if both appear in the market on the same day.
Newton’s mistake was not a lack of information. Few investors in eighteenth-century Britain could have brought more analytical ability to the question of money, rather his difficulty came about because he worried about the logic of remaining faithful to a sound decision while a crowd appeared to disprove it.
Whether or not he really said “I can calculate the motion of heavenly bodies, but not the madness of people”, shortly after his loss, he clearly saw that even a person who understood value could be drawn back by price.
Markets will always provide examples of somebody becoming richer more quickly but we must prevent their success from dictating what we do with our own wealth.
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