Long-Term Capital Management (LTCM) was a hedge fund management firm that utilized absolute-return trading strategies (such as fixed-income arbitrage, statistical arbitrage, and pairs trading) combined with high leverage. Its primary hedge fund, Long-Term Capital Portfolio L.P., failed spectacularly in the late 1990s, leading to a massive bailout by other major financial institutions.

In the book „When Genius Failed“, investigative journalist Roger Lowenstein describes thouroughly the founding of the infamous hedge fund LTCM. He describes how at first LTCM managed to achieve remarkable gains and how it later collapsed because it’s ill-founded strategy. This book further strengthened my opinion that in investing, the timing is actually more important than the investment objects you pick*. This is even more true now, when the world’s markets are strongly correlated. I don’t want to go into too much detail here why is it like that (I will touch this issue in some future posting) but let me give you an example from the Baltic stockmarket. Whichever stock you bought in the middle of 2009 (one of the very few exceptions: Tallinna Vesi), by today you would have at least doubled the initial investment. For some stocks (f.e. Silvano Fashion Group), you might have your money back tenfold. But, if you happened to buy the same Silvano stock just a year and a half before that, your position would be worth maybe a little more than third of your initial investment. And the same goes for almost all the stocks in the Baltics.

If you are not familiar with financial jargon or not heard about LTCM before, I would not suggest you to read the book. In fact, I would suggest to read it only when you are deeply interested in finance and investing. Besides, in perspective, the fall of LTCM is peanuts compared to the events of 2008 and there are much more interesting books available for the latter.

Some of the notes I made during reading this book:

• Whenever markets plunge, investors are stunned to find that there are not enough buyers to go around. The mistake is in thinking that markets have a duty to stay liquid or that buyers will always be present to accommodate sellers. The real culprit in 1994 was leverage. If you aren’t in debt you cannot go broke and can’t be made to sell. In which case, „liquidity“ is irrelevant.
• By leveraging one security, investors had potentially given up control of all their others. The securities might be unrelated, but the same investors owned them, implicitly linking them in times of stress. And when armies of financial soldiers were involved in the same securities, borders shrank.
• With too much liquidity, the market is apt to skid off the tracks. Too much trading encourages speculation, and no market, no matter how liquid, can accommodate all potential sellers when the day of reckoning comes.
• Scholes (the Nobel prize winner, author of Black-Scholes formula) could not believe there were people who would NOT go to extremes to avoid paying taxes
• There is nothing like success to blind one to the possibility of failure.