When Genius Failed: The Rise and Fall of Long-Term Capital Management (2000) by Roger Lowenstein
This book provides a compelling account of the people and events surrounding the dramatic rise and epic fall of Long-Term Capital Management (LTCM), a hedge fund that existed for a short period in the 1990s.
The first half of the book covers the rise of LTCM, explaining how top bond traders and esteemed academics came together and started the fund, using their combined knowledge and skills to engage in trading strategies involving bond, stock, and merger arbitrage. During the fund's first four years, from May 1994 to April 1998, it produced impressive double-digit returns with very low volatility, leading to an influx of new capital and great acclaim for the fund's principals.
The second half of the book covers the fall of LTCM, explaining how a combination of excessive leverage and overconfidence in precise mathematical models based on historic norms resulted in an accelerating downward spiral when the activity in various global markets failed to conform to model predictions. In a span of less than five months, from May 1998 to September 1998, the fund suffered catastrophic losses (billions of dollars) that threatened to disrupt the global financial system because of the fund's massive size and exposure. The situation was contained when the Federal Reserve helped coordinate a hasty bailout by several major financial institutions. After making up some of its losses, the fund was shut down in 2000.
I enjoyed reading this book, which could be considered a real-life financial thriller story. It was interesting to find out some of the things that went on behind the scenes and how such a massive failure could happen. From a practical standpoint, the book highlighted the dangers of using leverage and being overconfident in one's decisions.
Note: I read this book in July 2012.
That sounds like a pretty exciting how-to manual on what not to do.
Pretty crazy how people that are held in such high regard and esteem can suffer such dramatic downfalls when ego gets the best of them.
I think that us small, but growing, pool of focused and conservative investors with long-term viewpoints have the best seat of all.
Hi Dividend Mantra,Delete
Interestingly, the trades that brought down LTCM were probably good trades that would have worked out in the long run. However, LTCM had leveraged itself so much (30:1 or higher) that it simply could not stay in the trades when they turned against them. As Keynes said, the market can remain irrational longer than you can stay solvent, and Mr. Market was ruthless to an over-leveraged fund controlled by overconfident, ego-driven people.
I completely agree that small-time investors like ourselves, who take long-term views and fairly conservative positions, tend to do well in the long run. Moreover, by not using leverage, we are able to ride out market downturns instead of having to sell off at a loss to cover a margin call. Indeed, we are more likely in positions to buy during downturns, taking advantage of the opportunities Mr. Market has given us.
I'm on the lookout for dividend growth stocks at a great value. What do you think of WAG? I bought some around 29.50 a couple of weeks ago. Did you notice it on the drop regarding express scripts?ReplyDelete
Also, do you ever sell covered calls against your dividend stocks? Nice blog, just discovered it...I'll read up...
Thanks for your comment. I have been watching WAG and the recent developments regarding the company. I did notice the drop after the Express Scripts debacle and also the pop when the issue was resolved. However, I have not been motivated enough to buy the stock.
I do not sell covered calls or do any other kind of option activity. One reason is that I have not taken the time to learn about options. Another reason is that, based on the little that I do know about options, I am not convinced they are something I should get involved in.
I'm glad you discovered my blog and I hope you enjoy reading it!
eToro is the best forex broker for beginning and pro traders.ReplyDelete