If you have ever been in the investment field, you will probably know the name LTCM, a fund management company that has gone bankrupt. LTCM was a key factor in the 1997 Asian financial crisis, which once pushed the world financial system to the brink of collapse.

In the 1990s it was hip to invest in hedge funds. People saw them as new, exciting, and above all incredibly profitable financial products. Many wealthy individuals and companies wanted desperately to get a piece of the pie.Such un-natural events and the resultant fear & irrationality of markets could not be predicted and therefore could not be factored in mathematical models. The result was that all their widely diversified investments, which were supposed to behave independent of each other, started losing money simultaneously. Diversification lost its meaning and LTCM started to bleed money on each trade every single day. The leverage played its due part and the revered USD 4.6 billion of equity got almost wiped out in just four months.

And in the end, the model failed completely. The final sequence of LTCM autonomy is marked by an event, which, according to LTCM evaluation, is almost impossible. When the crisis broke in the summer of 1997, LTCM noticed a slight drop in profits, but that still didn't stop them. They continue to follow the pattern and gradually push themselves closer to the edge of the abyss.Do you know the story of Icarus? He was given a pair of wings that allowed him to fly, and he took full advantage. Unfortunately for him, he got a little carried away. Despite warnings not to, he proceeded to fly as high as he could, so high that the sun started to melt the wax that held his wings together. Within seconds, his wings fell apart and he plunged to his death. The 1997 Asian crisis and the 1998 Russian default caught Merton and Scholes – and LTCM – by surprise. And the losses LTCM experienced were totally unexpected!

Investors realize they don't always get relief. There will be times when bad things happen, they have to stand on their own two feet. Founded in 1994 by John W. Meriwether, Long-Term Capital Management (LTCM) described itself as “the financial technology company.”

LTCM applies academic knowledge to investing.

You can overintellectualize these Greek letters,” Pflug reflected, referring to the alphas, betas, and gammas in the option trader’s argot. “One Greek word that ought to be in there is hubris.” Many investors in the initial euphoria forget this basic premise and invest in derivatives like futures & options. LTCM managers learned the effects of leverage by paying up with their careers, social positions apart from personal investments in LTCM. Common investors also many times suffer heavy losses in derivatives. A 2016 CFA article written by Ron Rimkus pointed out that the VaR model, one of the major quantitative analysis tool by LTCM, had several flaws in it. A VaR model is calculated based on historical data, but the data sample used by LTCM excluded previous economic crises such as those of 1987 and 1994. VaR also could not interpret extreme events such as a financial crisis in terms of timing. [44] See also [ edit ] When Genius Failed teaches us that even the most talented investors can make mistakes if they become overconfident in their own abilities."

Roger Lowenstein is an American author and journalist. He is currently a contributor to The Wall Street Journal. In addition to his work as a journalist and book reviewer, he is the author of five best-selling books, including Warren Buffett - The Making of an American Capitalist, When Genius Fails . What does this book have for me? Learn about a hedge fund that tried to outperform the market and failed. thoughts on “ “When Genius Failed”: 9 timeless lessons from LTCM, the biggest investing failure in history!” Investors should always avoid leverage while investing. Warren Buffett does not call derivatives “Weapons of Mass Destruction” without reason. Warren has always advised Berkshire Hathaway shareholders and investor around the world to avoid borrowing for investing. In his 2014 letter, Warren writes: In this business classic—now with a new Afterword in which the author draws parallels to the recent financial crisis—Roger Lowenstein captures the gripping roller-coaster ride of the Greenwich, Ct. hedge fund, Long-Term Capital Management. Drawing on confidential internal memos and interviews with dozens of key players, Lowenstein explains not just how the fund made and lost its money but also how the personalities of Long-Term’s partners, the arrogance of their mathematical certainties, and the culture of Wall Street itself contributed to both their rise and their fall. Many investors try to mimic the investment decision of large institutional investors or FIIs or famous high net worth investors. LTCM episode is a glaring proof that no one is above errors. Investors who follow others do so at their own peril.The successful plan, the subsequent default and disintegration of LTCM did not harm the market as a whole. However, in the process of bailing out LTCM, they created many favorable conditions for the tycoons of LTCM. Q: Do you know if anyone from Long Term Capital Management has read WHEN GENIUS FAILED? Have you heard from any of them?