15 ms·

Newton’s Financial Misadventures in the South Sea Bubble [pdf]

96 points by jpelecanos 9y ago

comboy 9y ago
For those short on time, here's a TL;DR image: https://i.imgur.com/AEzxuLy.jpg https://i.imgur.com/AEzxuLy.jpg
- Charizma 9y ago
  more than a thousand words. Tx, comboy.
- Casseres 9y ago
  That chart shows a little under 10x from beginning to peak. Many people compare cryptocurrencies to the South Sea company, however, many of the different cryptocurrencies have gone 15-30x within the last year. A lot of the hype in the media seems to be gone (or is now "doom and gloom"), so it will be interesting to see whether or not today's values can be sustained without a high rate of people continously buying in.
  - pimmen 9y ago
    Because markets move quicker than they did in the 18th century. These bubbles have progressively grown and collapsed quicker and quicker with the introduction of railways, telegraphs, phones, improvements in printing presses, radio, television and finally the Internet. The pattern is still the same. You can look at Railway Mania, the Oil boom of the mid 1800s, the Florida property boom, the airline boom of the early 20th century and the Dot Com boom of the late 90s for reference if you want and you can see that they become progressively quicker.
    - ajmurmann 9y ago
      From the chart someone posted above it looks like the South Sea Bubble only took 1-2 years. Isn't that shorter than most recent bubbles.
    - Gargoyle 9y ago
      Cryptokitties might be seen to have continued that trend on an even faster scale!
      - SimbaOnSteroids 9y ago
        Idk I like the idea of a crypto collectible even if genetic crypto kitties misses the mark.
  - charlesdm 9y ago
    1. Most bubbles are not global but geographically restricted in some way; crypto is global. 2. There is some value to Blockchain technology, so the value is not $0. 3. When comparing, given all of these assets had a starting value of effectively $0 at launch, you should probably look at them from an angel investment PoV. Peter Thiel got similar returns when investing in Facebook. I'm not saying crypto is (entirely) comparable to Facebook in value (it might, it might not -- too early), but that's how I think the gains could make sense. It's valued like an internet startup, and then some. 4. The global market is still tiny? The entire crypto space is $550bn in market cap. Facebook is $552bn in market cap. Valuations have probably gotten ahead of themselves and a lot of the smaller coins will die eventually, but it's still a blip in the grand scheme of things. 5. There is too much capital in the world. Too much cheap debt. Too much free money. This will fuel the mania. You could have put $2m in the stock market in 2008-2009, and if you used leverage in a smart way, could have ended up with $75-100m.
    - pg314 9y ago
      > 2. There is some value to Blockchain technology, so the value is not $0. The value of current crypto-currencies might very well be zero, even if there is some value to blockchain technology. > 4. The global market is still tiny? The entire crypto space is $550bn in market cap. Facebook is $552bn in market cap. Comparing market caps like that is silly. I launch my own coin pg314-coin, 1 billion exist. I sell one to my friend for $1000. The market cap is now $1 trillion, twice that of Facebook... > You could have put $2m in the stock market in 2008-2009, and if you used leverage in a smart way, could have ended up with $75-100m. That is true of any period in time where the stock market went up. If you have a positive return to start with you can have an arbitrary multiplier with 'leverage used in a smart way'.
      - charlesdm 9y ago
        > The value of current crypto-currencies might very well be zero, even if there is some value to blockchain technology. Sure. I'm just saying; you can't know. Bitcoin might be around in 5 years, Ethereum might be the platform everything gets built upon, or something better comes along, or it all dies never to be heard of again. > Comparing market caps like that is silly. I launch my own coin pg314-coin, 1 billion exist. I sell one to my friend for $1000. The market cap is now $1 trillion, twice that of Facebook... Approx. $10bn worth of Bitcoin was traded in the last 24 hours ($200bn market cap). Approx. $3.4bn Facebook shares were traded per day during the last 50 trading sessions ($550bn market cap). Let's assume that even half of that Bitcoin trading is wash trading (which I don't think so). I think it's a pretty good way of looking at market caps. But you're right for the smaller coins -- those valuations are not in line with the money invested. > That is true of any period in time where the stock market went up. If you have a positive return to start with you can have an arbitrary multiplier with 'leverage used in a smart way'. Sure. But debt has been cheap in the last 10 to 20 years, and that has driven up asset prices significantly across the globe. People overpay for assets everywhere. In times when everything has been going up, people are more willing to take risks. In times where everything is falling, people are less likely to take on speculative investments. That's just part of the cycle.
- sorokod 9y ago
  Was there ever a "epidemiological" study of financial bubbles?
  - efoto 9y ago
    This is exactly the idea Robert Shriller suggests in his recent Narrative Economics lecture. https://youtu.be/b8l6wLSPnYY https://youtu.be/b8l6wLSPnYY
Charizma 9y ago
Suppose he was a master of seeing trends till his last days. All this happened when Newton was almost 80 years old. However, he died 7 years later happily as one of most famous people of all times.
- dnautics 9y ago
  Was he really happy? Newton was generally an angry loner who spent a lot of effort demeaning his peers.
  - Charizma 9y ago
    He died happily by demeaning his peers which were happy because they made a good money from South Sea stocks. :)
pimmen 9y ago
I read about it first in The Intelligent Investor By Graham, but it's nice to get a more in depth description of this anecdote. One of my friends once asked me how the growth in cryptocurrency value i an unsustainable bubble when so many smart and math proficient people believe in it. This is a handy bit of Newton trivia to make the point that the intelligent investor is not necessarily the one with the best math proficiency but the one who understands and abuses market folly. When everyone goes right look if there's anything of value people might've missed to the left.
- gautamnarula 9y ago
  Smart people moving into cryptocurrency and cryptocurrency being a bubble aren't mutually exclusive in another way: the long term potential of cryptocurrencies could be valid, even if it's in a short term bubble. I think there are a lot of parallels between cryptocurrency/block chain tech now and the dot com bubble in the 90s. During the dot com bubbles fortunes were made and lost over nothing and there were many scams and vaporware business, but the underlying tech was sound and if you could identify the real businesses (e.g. Amazon, eBay) from the trash you could still make a lot of money in the long term even as the bubble popped and the market crashed. In a way, the bubble popping was good in a 'creative destruction' sort of way for clearing the brush (scammy and terrible companies) so the real ones could emerge and thrive. I think something similar will happen with cryptocurrency and blockchain tech.
godelmachine 9y ago
This article kind of changed my life perspective in so many ways. Till now, I always believed that Newton & Einstein were "otherworldly" scientists who never dabbled in earthly mortal ventures like equity , SIP, mutual funds etc. Now I realize they had to worry about their subsistence & daily bread just as I need to.
- walrus1066 9y ago
  Also, that even the smartest of us are vulnerable to the power of greed, 'fear of missing out' and herd mentality, to trump rational thought/judgement. It is why we will always have financial bubbles and scams.
  - godelmachine 9y ago
    Agree with you, but I always thought highly of Newton coz he died a virgin. Not that I aspire to be like him :D But he was a hardcore scientist through & through. Maybe that's why I always thought of him as "out of this world" genius.
    - ShabbosGoy 9y ago
      > Agree with you, but I always thought highly of Newton coz he died a virgin. What? That’s why you think highly of him? Not because of his contribution to Physics and Newtonian mechanics? That’s really strange.
      - godelmachine 9y ago
        No, you got me very wrong. I thought he was a nerd, who disliked socializing and kept to himself in his home doing & reading science. Also thought he was hardcore introvert. Had I been like him the past few years, I would had achieved what I had set out to. Instead I pursued dames in my college & set out on romantic adventures. Was of the opinion that all super successful scientists & engineers had the same MO, & I always thought of Newton to be like that.
    - 9y ago
dharmab 9y ago
For those who want an accessible introduction to the South Sea Bubble, Extra History has a video series on the causes and aftermath: https://www.youtube.com/watch?v=k1kndKWJKB8&list=PLEb6sGT7oD8HXTsBEmm3uxFrnvsmfOfhg https://www.youtube.com/watch?v=k1kndKWJKB8&list=PLEb6sGT7oD...
- sinnet3000 9y ago
  Thanks for that link! It's really ironic I was getting ads of a Mexican bitcoin exchange while watching this!

96 points by jpelecanos 9y ago

comboy 9y ago

For those short on time, here's a TL;DR image: https://i.imgur.com/AEzxuLy.jpg https://i.imgur.com/AEzxuLy.jpg

Charizma 9y ago
more than a thousand words. Tx, comboy.
Casseres 9y ago
That chart shows a little under 10x from beginning to peak. Many people compare cryptocurrencies to the South Sea company, however, many of the different cryptocurrencies have gone 15-30x within the last year. A lot of the hype in the media seems to be gone (or is now "doom and gloom"), so it will be interesting to see whether or not today's values can be sustained without a high rate of people continously buying in.
- pimmen 9y ago
  Because markets move quicker than they did in the 18th century. These bubbles have progressively grown and collapsed quicker and quicker with the introduction of railways, telegraphs, phones, improvements in printing presses, radio, television and finally the Internet. The pattern is still the same. You can look at Railway Mania, the Oil boom of the mid 1800s, the Florida property boom, the airline boom of the early 20th century and the Dot Com boom of the late 90s for reference if you want and you can see that they become progressively quicker.
  - ajmurmann 9y ago
    From the chart someone posted above it looks like the South Sea Bubble only took 1-2 years. Isn't that shorter than most recent bubbles.
  - Gargoyle 9y ago
    Cryptokitties might be seen to have continued that trend on an even faster scale!
    - SimbaOnSteroids 9y ago
      Idk I like the idea of a crypto collectible even if genetic crypto kitties misses the mark.
- charlesdm 9y ago
  1. Most bubbles are not global but geographically restricted in some way; crypto is global. 2. There is some value to Blockchain technology, so the value is not $0. 3. When comparing, given all of these assets had a starting value of effectively $0 at launch, you should probably look at them from an angel investment PoV. Peter Thiel got similar returns when investing in Facebook. I'm not saying crypto is (entirely) comparable to Facebook in value (it might, it might not -- too early), but that's how I think the gains could make sense. It's valued like an internet startup, and then some. 4. The global market is still tiny? The entire crypto space is $550bn in market cap. Facebook is $552bn in market cap. Valuations have probably gotten ahead of themselves and a lot of the smaller coins will die eventually, but it's still a blip in the grand scheme of things. 5. There is too much capital in the world. Too much cheap debt. Too much free money. This will fuel the mania. You could have put $2m in the stock market in 2008-2009, and if you used leverage in a smart way, could have ended up with $75-100m.
  - pg314 9y ago
    > 2. There is some value to Blockchain technology, so the value is not $0. The value of current crypto-currencies might very well be zero, even if there is some value to blockchain technology. > 4. The global market is still tiny? The entire crypto space is $550bn in market cap. Facebook is $552bn in market cap. Comparing market caps like that is silly. I launch my own coin pg314-coin, 1 billion exist. I sell one to my friend for $1000. The market cap is now $1 trillion, twice that of Facebook... > You could have put $2m in the stock market in 2008-2009, and if you used leverage in a smart way, could have ended up with $75-100m. That is true of any period in time where the stock market went up. If you have a positive return to start with you can have an arbitrary multiplier with 'leverage used in a smart way'.
    - charlesdm 9y ago
      > The value of current crypto-currencies might very well be zero, even if there is some value to blockchain technology. Sure. I'm just saying; you can't know. Bitcoin might be around in 5 years, Ethereum might be the platform everything gets built upon, or something better comes along, or it all dies never to be heard of again. > Comparing market caps like that is silly. I launch my own coin pg314-coin, 1 billion exist. I sell one to my friend for $1000. The market cap is now $1 trillion, twice that of Facebook... Approx. $10bn worth of Bitcoin was traded in the last 24 hours ($200bn market cap). Approx. $3.4bn Facebook shares were traded per day during the last 50 trading sessions ($550bn market cap). Let's assume that even half of that Bitcoin trading is wash trading (which I don't think so). I think it's a pretty good way of looking at market caps. But you're right for the smaller coins -- those valuations are not in line with the money invested. > That is true of any period in time where the stock market went up. If you have a positive return to start with you can have an arbitrary multiplier with 'leverage used in a smart way'. Sure. But debt has been cheap in the last 10 to 20 years, and that has driven up asset prices significantly across the globe. People overpay for assets everywhere. In times when everything has been going up, people are more willing to take risks. In times where everything is falling, people are less likely to take on speculative investments. That's just part of the cycle.
sorokod 9y ago
Was there ever a "epidemiological" study of financial bubbles?
- efoto 9y ago
  This is exactly the idea Robert Shriller suggests in his recent Narrative Economics lecture. https://youtu.be/b8l6wLSPnYY https://youtu.be/b8l6wLSPnYY

Charizma 9y ago

Suppose he was a master of seeing trends till his last days. All this happened when Newton was almost 80 years old. However, he died 7 years later happily as one of most famous people of all times.

dnautics 9y ago
Was he really happy? Newton was generally an angry loner who spent a lot of effort demeaning his peers.
- Charizma 9y ago
  He died happily by demeaning his peers which were happy because they made a good money from South Sea stocks. :)

pimmen 9y ago

I read about it first in The Intelligent Investor By Graham, but it's nice to get a more in depth description of this anecdote. One of my friends once asked me how the growth in cryptocurrency value i an unsustainable bubble when so many smart and math proficient people believe in it. This is a handy bit of Newton trivia to make the point that the intelligent investor is not necessarily the one with the best math proficiency but the one who understands and abuses market folly. When everyone goes right look if there's anything of value people might've missed to the left.

gautamnarula 9y ago
Smart people moving into cryptocurrency and cryptocurrency being a bubble aren't mutually exclusive in another way: the long term potential of cryptocurrencies could be valid, even if it's in a short term bubble. I think there are a lot of parallels between cryptocurrency/block chain tech now and the dot com bubble in the 90s. During the dot com bubbles fortunes were made and lost over nothing and there were many scams and vaporware business, but the underlying tech was sound and if you could identify the real businesses (e.g. Amazon, eBay) from the trash you could still make a lot of money in the long term even as the bubble popped and the market crashed. In a way, the bubble popping was good in a 'creative destruction' sort of way for clearing the brush (scammy and terrible companies) so the real ones could emerge and thrive. I think something similar will happen with cryptocurrency and blockchain tech.

godelmachine 9y ago

This article kind of changed my life perspective in so many ways. Till now, I always believed that Newton & Einstein were "otherworldly" scientists who never dabbled in earthly mortal ventures like equity , SIP, mutual funds etc. Now I realize they had to worry about their subsistence & daily bread just as I need to.

walrus1066 9y ago
Also, that even the smartest of us are vulnerable to the power of greed, 'fear of missing out' and herd mentality, to trump rational thought/judgement. It is why we will always have financial bubbles and scams.
- godelmachine 9y ago
  Agree with you, but I always thought highly of Newton coz he died a virgin. Not that I aspire to be like him :D But he was a hardcore scientist through & through. Maybe that's why I always thought of him as "out of this world" genius.
  - ShabbosGoy 9y ago
    > Agree with you, but I always thought highly of Newton coz he died a virgin. What? That’s why you think highly of him? Not because of his contribution to Physics and Newtonian mechanics? That’s really strange.
    - godelmachine 9y ago
      No, you got me very wrong. I thought he was a nerd, who disliked socializing and kept to himself in his home doing & reading science. Also thought he was hardcore introvert. Had I been like him the past few years, I would had achieved what I had set out to. Instead I pursued dames in my college & set out on romantic adventures. Was of the opinion that all super successful scientists & engineers had the same MO, & I always thought of Newton to be like that.
  - 9y ago

dharmab 9y ago

For those who want an accessible introduction to the South Sea Bubble, Extra History has a video series on the causes and aftermath: https://www.youtube.com/watch?v=k1kndKWJKB8&list=PLEb6sGT7oD8HXTsBEmm3uxFrnvsmfOfhg https://www.youtube.com/watch?v=k1kndKWJKB8&list=PLEb6sGT7oD...

sinnet3000 9y ago
Thanks for that link! It's really ironic I was getting ads of a Mexican bitcoin exchange while watching this!