When the bubble burst, he lost £20,000 – about £6 million today (adjusted for inflation), or around $14m. He lamented: “I can calculate the motions of heavenly bodies, but not the madness of people.”
If a genius like Newton couldn’t time the market, what chance do we have?
The bubble problem
Bubbles are only clear in hindsight. In 1720, it was Britain’s South American trade monopoly. In New Zealand, the 1987 sharemarket crash obliterated fortunes built on leveraged property and equities. More recently, Auckland’s house prices tripled from 2011 to 2021, showing bubble-like traits.
Today, the question is artificial intelligence: transformative like the microchip, or another bubble waiting to pop? Nobody knows. Stocks such as Nvidia have surged over 100% in the past year on AI hype, but history warns of dotcom-style crashes when enthusiasm outpaces reality.
This uncertainty makes diversification essential. When you can’t predict winners or losers, the better approach is to own a bit of everything. Buy a broad market index and let capitalism allocate capital to productive uses over time.
The case for buying the market
On Edinburgh’s Royal Mile, I passed a statue of Adam Smith, the father of modern capitalism. His “invisible hand” insight, that markets direct resources efficiently through countless individual decisions, is profound.
Capitalism rewards value and weeds out hype, but picking winners is tough. Even professional fund managers often underperform broad indices. New Zealand investors can choose diversified options such as local or global index funds covering thousands of companies.
A diversified portfolio may not catch the next Nvidia early, but it won’t collapse if AI falters.
When smart money gets dumb
Newton’s story shows intelligence doesn’t shield you from emotions. He sold early (fear), watched from the sidelines (Fomo), then bought at the peak (greed).
New Zealand’s 1987 crash echoed this: doctors, lawyers, and accountants – smart people – borrowed heavily for “sure things”. The market’s 60% plunge in weeks erased life savings, leaving bankruptcies and trauma.
The diversification defence
Diversification doesn’t prevent losses – but it limits catastrophic ones. Owning only South Sea stock was disastrous to Newton; a slice of all British companies would’ve hurt but recovered. Today’s AI boom is similar. It might transform the world… or overhyped stocks could crash.
Diversified investors capture the upside without betting everything. The MSCI World Index’s ~8% average annual gross return over 30 years (despite crashes) proves broad market resilience.
Lessons from Newton
Stood before Newton’s statue, I saw the irony: a genius undone by emotions we all share.
Markets will always breed bubbles because human nature – greed, fear, herd mentality – never changes. Newton needed humility and diversification, so do we.
You don’t need to outsmart markets to succeed. Admitting you can’t is often the smartest move you can make.
A trusted financial adviser can’t predict bubbles. But they can keep you grounded when the urge to float along with the hype arises. They can remind you that past performance isn’t future returns and crowd behaviour is risky. And on top of that, they’ll help build a diversified portfolio to weather storms.
Take Newton’s lesson: make sure your investments are diversified enough to survive the next bubble.
