Dividends and Why did Newton bet nearly all his wealth on one stock?

One of the easily recognizable names is Isaac Newton – a brilliant scientist. He was able to begin to understand the world around us; he could calculate the motion of heavenly bodies. But how did he invest his money?

Larry MacDonald examined his investing, he was prudent and profitable for most of his life. He was living at a lifestyle well above the average. In today’s money he was a millionaire, then he speculated.

The South Sea Co was set up in 1711 to restructure the British government’s debt load, which was in debt because of wars with Spain and France. One has to remember after Columbus “discovered” the new world, Spain conquered and brought to Spain shiploads of Mexican gold and Peru’s silver to become the wealthiest country in Europe and the world. The English were envious and a charter was given to the South Sea Co. to bring gold to England, for the Parliament gave the company a monopoly on English trade with Spain’s colonies in South America.

The South Sea Co was a private-public partnership and owners went to the English government and essentially converted public debt into equity, with substantial shares going to the those in Parliament (the company ensured as government changed so did shares held by those in political power). Dividends were paid on the stock at a lower rate than interest on bonds. The company seemingly had the goodwill and backing of Parliament which reinforced the legitimacy of the company.

Issac Newton bought some shares in 1712 and continued to buy more shares for 1720. He must have thought he was prudent and equally important knowing riches came from South America and believing the English would be more powerful than the Spanish, the riches would come to England. In 1720 the company brought in an installment plan for the public to buy the shares only with only 10% down.

In 1720 the price of the shares went from 128 in January to 350 in April and Newton sold most of his shares for a profit of $4 million. However the price kept rising and during June Newton bought at 700 a share. The price increase to above almost 1,000, which made the company worth 2 x the value of all the land in England. Could the shares go higher? Insiders began to sell, all the Spanish gold was not coming to England and soon the shares fell to $200, so ended the South Sea Bubble. Newton ended up with a third less capital. In 1721 the shares were less than 50 and shortly after was worth nothing.

Linking to dividend paying stocks, in hindsight it was easy to see why Newton invested. He thought the government guaranteed the company, Spain’s gold and silver made it the richest country in the world, why should the English not have a part? and the company managed to stay in business for a number of years. In hindsight, he did the correct thing by selling in April, but buying again with most of his capital under the greater fool theory typically does not work. If Newton bought for the dividend, he would have not spent so much money because the yield would have been less – price of stock rises, dividend yield falls under the company can increase the dividend. In this case the dividend was not increased, discipline matters

There are more questions than answers, till the next time – to raising questions.

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