Newton’s fourth Law of Motion: “…returns decrease as motion (trading) increases.”
Sir Isaac Newton is widely renowned for his groundbreaking contributions to science, particularly for his development of calculus and his formulation of three fundamental laws of motion:
Every object persists in its state of rest or uniform motion unless acted upon by an external force.
The force acting on an object is directly proportional to its mass and acceleration.
For every action, there is an equal and opposite reaction.
However, beyond his scientific achievements, Newton’s involvement in the financial markets reveals a lesser-known aspect of his life. In the spring of 1720, Newton became embroiled in the frenzy surrounding the South Sea Company, one of the most sought-after stocks in England at the time. Initially, Newton wisely sold his shares, realizing a substantial profit of £7,000. Yet, succumbing to market speculation and influenced by the prevailing euphoria, he reinvested at a significantly higher price, ultimately suffering a loss of £20,000. This experience left a lasting impact on Newton, who adamantly avoided any discussion related to the South Sea Company thereafter.
Estimates suggest that Newton’s losses, adjusted for inflation, would amount to as much as £40 million in today’s currency.
The South Sea Bubble, as it came to be known, has been labeled variously as the world’s first financial crash, a Ponzi scheme, and a cautionary tale of groupthink leading to speculative mania.
Newton, typically a prudent investor, primarily entrusted his funds to stable government bonds, which provided steady returns. However, the allure of quick gains and the fear of missing out (FOMO) prompted him to deviate from his conservative approach, resulting in significant financial setback.
Reflecting on Newton’s misfortune, renowned investor Warren Buffett remarked in his 2005 annual shareholder letter that while Newton’s laws of motion demonstrated unparalleled genius, his abilities did not extend to the realm of investing. Buffett humorously suggested that had Newton not been traumatized by his financial loss, he might have discovered a hypothetical “Fourth Law of Motion,” illustrating the inverse relationship between investor returns and excessive trading activity.
In summary, Sir Isaac Newton’s foray into the financial markets serves as a cautionary tale, reminding us that even the most brilliant minds are not immune to the irrationalities of human behavior and the pitfalls of speculative fervor.
Quote of the month
The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high returns simply imply that an asset has become more expensive and is a poorer, not better, investment.
– Billionaire investor Ray Dalio, Founder, Bridgewater Associates
“India offers best structural growth story among large economies”: UBS
“India likely to grow at 10% for 10-20 years”: Deloitte’s Romal Shetty
Economic Indicators Overview:
Manufacturing PMI: In February 2024, the Purchasing Managers’ Index (PMI) for the manufacturing sector rebounded to 56.9, reaching a five-month high and extending its expansionary streak for the 32nd consecutive month.
Services PMI: India’s services sector exhibited robust growth in February, with a PMI reading of 60.6.
GST Collection: India’s gross revenues from the Goods and Services Tax (GST) grew at a three-month high pace of 12.54% in February, surpassing ₹1.68 lakh crore.
Equity Market Overview:
The S&P BSE Sensex and Nifty 50 both edged higher by 1.0% and 1.2% respectively in February 2024.
The S&P BSE MidCap rose by 1.5%, while the S&P BSE SmallCap fell by 1.1%.
In terms of S&P BSE sectoral performance, the top performers in February 2024 were S&P BSE Oil & Gas (6.7%), S&P BSE Auto (6.4%), and S&P Realty (6.3%). S&P BSE FMCG (-2.2%) was the only sector that underperformed.
Foreign Institutional Investors (FIIs) were net buyers (Rs 1,539 crores), but it was the surge in Domestic Institutional Investors (DIIs) inflows (Rs 25,379 crores) through Systematic Investment Plans (SIPs) that bolstered the markets.
An impressive milestone was reached as Mutual Funds’ Systematic Investment Plans (SIPs) hit a record high of ₹19,186 crore, surpassing January’s ₹18,838 crore.
Fixed Income:
In the near-term, bonds markets are expected to stay positive mainly due to the expected beginning of a rate cut cycle
Additionally, an increase of FPI debt inflows and attractive global rate cycles will also keep debt markets high
10 -yr -g sec yield is expected to be in the range of 6.5% to 6.75%
1-year T-Bill yields are expected to ease with gradual improvement in the banking system liquidity
Looking Ahead:
India’s macroeconomic situation remains robust, with the recent budget underscoring the government’s commitment to strengthening economic health. However, despite this strength, valuations are not currently favorable. As such, we advise an investment strategy focused on hybrid and multi-asset allocation schemes, allowing for dynamic management of exposure across different asset classes.
Our primary recommendation for new investors considering lump-sum investments is to explore hybrid and multi-asset allocation schemes. These offer flexibility in adjusting equity exposure and reallocating to other promising asset classes opportunistically.
Existing investors are advised to maintain their positions, as India’s long-term growth narrative remains compelling. For those seeking to increase equity exposure, we suggest focusing on schemes with flexible investment mandates that can adapt to changes in market capitalization and sectors.
