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  • Writer's pictureJohn Gibson, CFA

FOMO: A Historical Perspective

Updated: 4 days ago

This is a cautionary tale of how FOMO (the Fear of Mission Out), or “herd mentality”, primarily an emotional bias, can cause devastating investment losses.

In 1720, Sir Isaac Newton, renowned for his groundbreaking contributions to science and mathematics, fell victim to one of history’s most infamous financial bubbles—the South Sea Company. Despite his formidable intellect, Newton’s foray into speculative investment underscores the unpredictable nature of financial markets and the vulnerability of even the most brilliant minds.

The South Sea Company, established in 1711, was initially granted a monopoly to trade with South America. By 1720, the company's stock prices skyrocketed, driven by rampant speculation and exaggerated promises of immense wealth. The resulting "South Sea Bubble" attracted investors from all walks of life, including Newton.

Early in the year, Newton invested in the company, purchasing shares as the stock prices surged. Initially, his decision appeared sound; the value of his shares increased, prompting him to sell at a substantial profit. However, as the stock continued to soar, Newton succumbed to the temptation of re-entering the market, reinvesting at even higher prices.

The bubble reached its peak in the summer of 1720, only to collapse spectacularly in the following months. The rapid decline in stock prices devastated investors, including Newton. Reports suggest that he lost approximately £20,000—a significant sum equivalent to several million pounds today.

Reflecting on the financial debacle, Newton reportedly remarked,

"I can calculate the motions of the heavenly bodies, but not the madness of men." 

His statement highlights the challenges of predicting market behavior, even for someone accustomed to solving the most complex problems of the natural world.

Newton’s experience serves as a cautionary tale about the perils of speculative investment and the limits of rationality in financial markets. It underscores the enduring lesson that no one, regardless of their intellect or expertise, is immune to the caprices of economic speculation.

Today, the story of Newton and the South Sea Company remains a poignant example of the risks inherent in investing and the importance of caution and prudence in financial decisions.


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