Everyone knows that Sir Isaac Newton was quite a scientist. Among his many accomplishments, he is perhaps best known for formulating the laws of motion.
What’s less widely known is that Newton also made a costly stock-trading mistake that should serve as an important lesson for all investors.
According to an excerpt from a new book, Money for Nothing, by Thomas Levenson, Newton was an early investor in the South Sea Company. At one point, he cashed out, with profits estimated at 200 times his former annual salary as a professor at the University of Cambridge.
After selling, the stock moved higher — much higher — and Newton felt like he had “lost” by selling too soon. So he got back in, paying more than twice what he had gotten per share when he sold. Within months, investors lost confidence in the stock, and as they unloaded shares the price plummeted. Newton’s losses were estimated at today’s equivalent of $4 million.
Levenson wrote, “What gnawed at Newton for years, and what still seems strange, is that his capacity for dispassionate analysis failed him when he needed it most.”
A deceptively simple question
We can look at Newton’s experience, shake our heads, and think, “What a shame. He should have been content with what he made."
But aren’t we all subject to such second-guessing? As I wrote a few weeks ago, “No investor will always get in at the very bottom or get out at the very top. And that leaves lots of room for doubt and disappointment to enter in. The key is learning to live with such feelings. To accept good gains when we know there could have been even greater gains. To accept some bad stretches on the way to good long-term results.” (See The Investor's Challenge: Making Peace With Doubt and Disappointment.)
A key question to consider is: How much is enough?
It sounds so simple and yet can be so emotionally fraught.
It reminds me of a comment made by a financial planner I met years ago. He said, “Be sure you know where the top of the mountain is. Because if you get there and keep climbing, the only place to go is back down the other side.”
It isn’t a perfect metaphor because you could hit a financial goal, keep climbing by staying invested, and gain even more. The danger, of course, is that you could hit your goal, keep climbing, and then, in fact, climb down the other side.
Which would be worse?
Consider this: What would hurt more? Reducing risk once you hit a predetermined age or accomplish a predetermined goal, only to realize that if you hadn’t made any changes your portfolio would have gone even higher? Or ignoring your plan to reduce risk, and then seeing your investment decline in value? For most people, my guess is that the second option would be harder to take.
So again, ask yourself, how much is enough? Give it some thought and prayer. If you’re married, be sure to talk it over with your spouse. And then agree ahead of time at what age or portfolio value would it make sense to reduce risk. And just as importantly, agree that when that time comes, you won’t second guess yourself. Decide now that after that point, if you realize your portfolio would have grown even more had you not become more conservative, you won’t live with regret.