Financial History Issue 124 (Winter 2018) | Page 23

But then, as the bubble was inflating, in April and May 1720, he sold most of that, at prices that were three to four times his cost. This liquidation appears to have stretched roughly over the period shown in the price chart. However, a few weeks after the last of those sales, in mid-June 1720, he appears to have jumped back into the market, at prices about double those at which he had sold. He then continued making further investments for himself until the end of August, just before the collapse of the bubble. Newton’s misadventures in the South Sea Bubble are of interest not just because of his fame. He represented an apparently very small fraction of investors, namely those who were initially skeptical of the bubble to the extent of selling out, yet eventually yielded to the groupthink that moved the vast majority of investible funds in Britain into the hands of the South Sea Company. There were numerous other skeptics who held to their views, and some of them real- ized large profits. Probably the most famous example is Thomas Guy, whose name is immortalized in the name of the hospital he founded largely with the profits from the bubble. As with Newton, the outline of the widely-accepted story is correct, but recent studies of Guy’s investment books show some previously unknown twists to it. Guy started liquidating his South Sea stock holdings, about five times larger than Newton’s, at about the same time as Newton. Guy completed his sales at almost the same time that Newton started buying again, as is shown in the price chart. It turns out that later he did make some purchases, but this appears to have come from motives different than New- ton’s. Guy had not only sold out his South Sea holdings, but also sold some call options, and his purchases were meant to cover those short sales. The losses he sus- tained were substantial, but they were only a fraction of his gains. Overall, Guy appears to have had the correct view of the bubble from the start, and he never wavered. His market tim- ing was not perfect, as he sold his South Sea stock at an average price of £420, only about half the peak value it reached afterwards. Also, his sales of call options would have been very profitable, had the expiration date been a month later, as by that time market prices were cratering. Still, Guy did make big profits, as he had bought in over the years at less than a quarter of his sale price, and his short sale losses were moderate. His reputation as a sagacious financier who successfully rode the South Sea Bubble is well deserved. We do obtain some hints of what may have caused Newton’s switch from a skep- tic to an ardent believer in the bubble. Just as he was completing the sales of his own holdings, he executed what were, in effect, purchases for the Hall estate, and those are marked in the estate records as having been carried out at the request of Fran- cis Hall, the principal beneficiary of that estate. This was followed by some more purchases for that estate, again after calls from Francis Hall, and then a big move of Newton’s own funds into South Sea stock. There had to be vigorous debates among all the executors and Hall about the pros- pects of the South Sea venture, with Hall likely the most fervent enthusiast. Those debates, together with the rapidly-rising market price, apparently led Newton to change his mind. It should be noted that Newton did become a truly arde