In 1720, South Sea Company was the hottest stock in England.
And people were buying it like crazy, making it’s price go up several times it’s intrinsic value.
Newton owned some stocks in South Sea Company at the time. And when he saw people buying it like crazy, he said:
“I could calculate the motions of the heavenly bodies, but not the madness of the people.”
So, he sold his stock and pocketed a 100% profit of £7,000 (About $1M today).
But, the prices of South Sea Company kept rising.
Newton saw this and got consumed by FOMO.
Only if he had held his stocks for longer, he would have made much more profit.
He couldn’t resist the charm of the market. So he went back in again and bought the stock at a much higher price.
And what happened next shocked Newton so much that he forbade anyone to mention the name “South Sea” in his presence.
The stock collapsed and Newton lost about £20,000 ($3M in today’s money).
You see, the stock market can be irresistible. And that is what makes it dangerous.
And there are 2 lessons to be learned from this story:
- Don’t follow the herd in the stock market.
The real secret of success in the stock market is: Buy when everyone is selling in panic (coz that is when you get stocks at heavy discount).
And sell when everyone is buying like crazy (cause that is when prices go up and you get bonus money for the stocks you bought at discount)
In words of Warren Buffet:
Be greedy when others are fearful and fearful when others are greedy.
- Stop trying to time the market.
Newton thought he could go back in at a higher price and sell his stocks at an even higher price… thus making more profit.
But the problem is: You can’t know when the market will come trembling down.
Your only chance of redemption is buy the stocks at any time (except when it goes way too high)…
And hold them for 20 years straight.
- Diversify
Newton put all his money in the South Sea Company.
And he lost most of it.
Don’t put all of your money in one stock because it is the hottest.
Diversify your portfolio as much as you can.
You do this and you will perform far better than the market gurus who are constantly trying to time the market.
These are the simple principles we use for our clients… and it has helped them achieve Financial freedom in 10 years or less.
