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And they've also used math to lose it: https://en.wikipedia.org/wiki/When_Genius_Failed https://en.wikipedia.org/wiki/When_Genius_Failed

beagle3 11y ago
Did you actually read the book? The math people (Merton, Scholes) saw the craziness, pulled enough of their money out in time, and didn't lose it. The finance people (first and foremost Merriwether) were those who believed they are smarted than everyone and went bankrupt.
- w1ntermute 11y ago
  I didn't say they understood the math they were using and lost it, I said they used math and lost it. Obviously if you always understand what is going on, you'll never find yourself up shit creek without a paddle.
  - beagle3 11y ago
    And I ask again, since you linked to this book - did you read it? Or was it just "these guys failed, and they started out by using math, so ..." statement? They did not use math at the time they lost money. They were were essentially gambling (doing "risk arbitrage", which is all risk and no arbitrage).
saosebastiao 11y ago
I love the story of LTCM. It was pure mathematical hubris, but it was also amazing what they accomplished before they crashed. I mean 40% returns year over year for nearly 3 years wasn't just luck. The crazy thing about LTCM, and the thing that everybody overlooks is that LTCM didn't die by bankruptcy...they died because of the systemic risk of their portfolio size and the subsequent intervention from the federal reserve. They had $100B under management, but only lost $5B in 4 months. It was a major catastrophe, sure, but it was only major because of the implications from its absolute size. A 5% drop in 4 months is something that can be recovered from on a personal portfolio level or even a small hedge fund level...but at LTCM's size it was endangering the financial system as a whole because it was threatening to bankrupt overleveraged institutional investors. Jane Street Capital, while very opaque about what they do, has given me enough room to believe that LTCM has inspired a lot of their strategy. This always makes others perceive me as a quack that doesn't like history, but if another LTCM came around that was using the same strategy but on a much smaller scale and with a well spelled-out liquidation strategy, I would invest. In fact, I would probably bet big on it (>50% of my portfolio). Nobody is gonna touch it though, because everybody is so conservative in finance. "We're gonna follow LTCM's strategy" isn't a sales pitch, it's a punch line. But outside of finance, there is a ton of precedent for monumental successes with an idea that has failed before. And I think LTCM is one of those ideas.
- zhte415 11y ago
  LTCM did make an important lesson that you imply, and existed before, but often wasn't adhered to: When you get to a certain size, close to new money.
sgt101 11y ago
The bail out that underpinned the financial crisis; "calling all funds everywhere : we will cover your stupid mess, you cannot, will not lose." This, and flogging all the gold are the reasons to blame Gordon Brown for the current mess the UK's in.
- whatok 11y ago
  To be clear, the Fed organized a private sector bailout of LTCM but did no taxpayer money was spent on it. Much different than the financial crisis.

beagle3 11y ago

Did you actually read the book? The math people (Merton, Scholes) saw the craziness, pulled enough of their money out in time, and didn't lose it. The finance people (first and foremost Merriwether) were those who believed they are smarted than everyone and went bankrupt.

w1ntermute 11y ago
I didn't say they understood the math they were using and lost it, I said they used math and lost it. Obviously if you always understand what is going on, you'll never find yourself up shit creek without a paddle.
- beagle3 11y ago
  And I ask again, since you linked to this book - did you read it? Or was it just "these guys failed, and they started out by using math, so ..." statement? They did not use math at the time they lost money. They were were essentially gambling (doing "risk arbitrage", which is all risk and no arbitrage).

saosebastiao 11y ago

I love the story of LTCM. It was pure mathematical hubris, but it was also amazing what they accomplished before they crashed. I mean 40% returns year over year for nearly 3 years wasn't just luck. The crazy thing about LTCM, and the thing that everybody overlooks is that LTCM didn't die by bankruptcy...they died because of the systemic risk of their portfolio size and the subsequent intervention from the federal reserve. They had $100B under management, but only lost $5B in 4 months. It was a major catastrophe, sure, but it was only major because of the implications from its absolute size. A 5% drop in 4 months is something that can be recovered from on a personal portfolio level or even a small hedge fund level...but at LTCM's size it was endangering the financial system as a whole because it was threatening to bankrupt overleveraged institutional investors. Jane Street Capital, while very opaque about what they do, has given me enough room to believe that LTCM has inspired a lot of their strategy. This always makes others perceive me as a quack that doesn't like history, but if another LTCM came around that was using the same strategy but on a much smaller scale and with a well spelled-out liquidation strategy, I would invest. In fact, I would probably bet big on it (>50% of my portfolio). Nobody is gonna touch it though, because everybody is so conservative in finance. "We're gonna follow LTCM's strategy" isn't a sales pitch, it's a punch line. But outside of finance, there is a ton of precedent for monumental successes with an idea that has failed before. And I think LTCM is one of those ideas.

zhte415 11y ago
LTCM did make an important lesson that you imply, and existed before, but often wasn't adhered to: When you get to a certain size, close to new money.

sgt101 11y ago

The bail out that underpinned the financial crisis; "calling all funds everywhere : we will cover your stupid mess, you cannot, will not lose." This, and flogging all the gold are the reasons to blame Gordon Brown for the current mess the UK's in.

whatok 11y ago
To be clear, the Fed organized a private sector bailout of LTCM but did no taxpayer money was spent on it. Much different than the financial crisis.