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