January 28, 2008

Book Review: When Genius Failed

Although the book is not new, but I think reading it now is timely.

The book is about the famed hedge fund Long Term Capital Management meteoritic rise and spectacular collapse. it discusses the formation, the strategies employed by the fund, the market turmoil, and the dizzying losses by the fund.

The book is timely because similar circumstances to today's liquidity and widening spreads were prevalent at that time as well. Credit spreads were widening, lenders were no were to be found, and market liquidity dried up causing crashing asset prices. These are similar aspects to the current environment but today we have a housing recession that is adding a complicating dimension to the mix.

Here are my take ways from the book as an investor:
  1. Wall Street is less transparent than you think.
  2. It is critical that you have a focus, even the pros have focus and specialized areas that they do not stray from. LTCM was successful when it stuck to its niche but once greed took over and expanded to other areas, it suffered tremendously.
  3. Long term is superior to any other holding periods as it ignores short term economic and market fluctuations that bear no weight on assets value.
  4. We will have many market crises over our lives, it would be foolish to react to any of them without proper understanding of the causes. Never shoot and ask questions later.
  5. Individuals trading against the professionals are at an information disadvantage. Many professionals knew LTCM positions and traded against them with disregard to any economics; any individual with no such knowledge would have been killed for no apparent reason.
  6. Wall street will knows no shame. Most of the principals of LTCM have launched another hedge fund with mostly the same investors of the previous fund.


heterocedastico said...

The market can stay irrational longer than you can stay solvent.

John Maynard Keynes

Sami said...

yes I agree. markets are not always rational or yet they may never are. What is the yardstick of rationality anyways? A model or a theory.

very good quote. Another I like is “There is nothing so disastrous as a rational investment policy in an irrational world”