You, of course, can’t be caught in a bubble. You buy the stocks that your friends and everyone else are talking about. Everything feels so right. Investors certainly felt the same during the Dot-com bubble, the Roaring Twenties (1920s), the South Sea bubble, and the Tulip mania. The euphoria feels so exciting.
Newton couldn’t stand the thought of the money he had missed out on
Read pt. 1 here.
The history of chasing
Isaac Newton was undoubtedly an intelligent individual. Newton must have been able to outsmart the financial markets when he was investing. Sure, Newton made a lot of money when he sold most of his investments during the South Sea bubble. But he then invested back into the top of one of history's biggest bubbles. This re-investment was truly costly to Newton. The bubble busted. Together with all the other investors in the South Sea bubble, Newton lost most of his fortune when the market dropped like a stone.
When Newton first sold at the start of the South Sea bubble, he thought that the stock prices in the markets had gone too far up. So, why did he jump back into the South Sea bubble? Newton was a human being like the rest of us. Regardless of how rational you think you are, you get caught by emotions. Newton couldn’t stand the thought of the money he had missed out on when selling too soon as the prices continued to rise. The consensus in the financial markets was that prices were to continue to rise for a long time. The financial markets were euphoric and complacent. Newton was annoyed seeing people around him making money while he was on the sidelines. The fear of missing out (FOMO) led one of history's great intellectuals to jump back into financial markets and lose all the money he had made prior when taking profits earlier at the beginning of the bubble.
“I can calculate the movement of the stars, but not the madness of the people.” Newton reflected after losing great fortune during the South Sea bubble.
Long-term investing or dollar-cost averaging are no guarantee of earning additional money
Don’t blindly follow
Investing your money is not without risk. If you invest in something that everyone is talking about, you are likely paying a price far above the intrinsic (true) value. Doing so, there’s a chance that the price of the stock is about to peak, and the price then starts to drop. Sometimes assets recover after a big sell-off but other times they do not. Investors of the South Sea Company, the Tulip mania, RCA (Radio Corporation of America) during the roaring twenties, and Pets.com during the Dot-com bubble lost all their money even when it all seemed so right. So, be judicious when investing. Blindly trusting long-term investing or dollar-cost averaging are no guarantee of earning additional money or even keeping your money. Insights, information, and portfolio diversification are important factors when investing.
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Read pt. 1 here.
All the best.