I talk a lot about how investing is only partly intellectual. Being smart is not enough. I was reminded recently of this through the story of Sir Isaac Newton, surely one of the smartest people to ever walk this planet. He was a terrible investor. His famous quote was that he could “calculate the motions of heavenly bodies but not the madness of men.” In 1720 he invested in a company called the South Sea Trading Company. He did well and sold his shares. However, the share price ended up entering a huge bubble. His emotions got the better of him and he ploughed his fortune back in at a much higher price. The story is that he went on to lose everything.
“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control.”
- Charlie Munger
Whilst there is no doubt that investing has changed a lot since 1720, some things will always be true and one constant is human nature. Human nature is the same today as it was in the 1700s. And it will be the same in one hundred years from now. So long as fear, greed and regret live in our minds, bubbles will form, and intelligent people will get sucked into them. As Jim O’Shaughnessy (Chairman and CEO of O’Shaughnessy Asset Management, and author of four books) wrote recently, it tends to be the stocks with the most intoxicating story that end up in a bubble. In the twenties, it was new era industries such as radio and movie companies. In the 1950s it was new technologies such as Texas Instruments and Polaroid. In the dotcom era it was anything with .com after the name. And most recently it was bitcoin.
An article in the New York Times recently looked at the hard lessons learnt by bitcoin investors.
One investor was quoted as saying, “I got too caught up in the fear of missing out and trying to make a quick buck. The losses have pretty much left me financially ruined.”
The thing that conspires against us when it comes to investing is that good investing is, and always should be, boring. But when it comes to getting rich, the desire to make it exciting and to do it overnight will never go away. It was bitcoin this time, and it will be something else next time. The power is so strong that neuroeconomists have shown that the brain activity of a person making money on their investments is indistinguishable from a person high on cocaine or morphine. I am sure if you were investing in bitcoin during the back end of last year then you can relate to that feeling.
My friend Carl Richards shows it brilliantly in his sketch below:
Confusing investing and entertainment happens all the time, and it almost never ends well. So next time you feel the lines blurring, find something good on TV, go to a party, do anything other than log onto your investment account.