My 3 Takeaways from "When Genius Failed" by Roger Lowenstein

🔖 Summary in 3 Sentences

This book tells the story of Long Term Capital Management. How they got started and how they end. Through this story, you will learn about the market, risk, and trades.

‍🧑🏻 Who Should Read It?

Someone who is interested in history and the market.

🔑 My 3 Key Takeaways

Leverage.

If you aren't in debt, you can't go broke and can't be made to sell, in which case "liquidity" is irrelevant. But a leveraged firm may forced to sell, lest fast-accumulating losses put it out of business.

Throughout the story of Long Term Capital Management, they are very confident with their trades. Thus, they leveraged too much. Their leverage is sometimes 10 times the size of big banks. Their strategy is to earn off the small spread of bonds, therefore they need big leverage to magnify the gain. But when the market turns against them, they are forced to sell because the debt is chasing after them. Heard a lot of stories of people building up their debt during a good economy, thinking the bull will go on forever. When the bear strikes, they lost all their money. Don't leverage.

Risk.

He humbly warned, however, "It's a wrong perception to believe that you can eliminate risk just because you can measure it.

A lot of times we thought we can eliminate risk. In all the things we do, there will be risk associated with it. We shouldn't think that we can eliminate it because we know how much the risk is. In the Long Term Capital Management case, they can calculate what is the probability of the market going against them. They thought the risk is once in a thousand years, but it strike them when they are their fourth year in the business. With one single blow, they lost all their fortune in just a few months. Nothing is risk-free.

Greed and fear.

They had forgotten that traders are not random molecules, or even mechanical logicians such as Hilibrand, but people moved by greed and fear, capable of the extreme behavior and swings of mood so often observed in crowds.

We think the market is rational. Good news moves the market up, and bad news moves the market down. In the Long Term Capital Management case, they thought their mathematical model can predict the market movement. They thought the spread is too big to be logical. But the market is composed of humans with fear and greed, thus, you can never predict it through a mathematical model. To survive in the market, you got to learn about greed and fear, and how to control them.

💭 Afterthought

This is the story of LTCM happening in the 1990s. Through the story, you witness the rise and fall of it. But the obvious theme of this story is that humans are the ones making all the rise and fall of the economy. You can see all the bankers and feds manipulating the market. It makes you feel like you can't do anything against the big bankers on Wall Street. They are the ones that control the world economy.

🛍 How to Buy?

I bought this Kindle e-book on Amazon for RM37.26.

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