Investors making the same mistakes over and over…

By: ispeculatornew
Date posted: 10.23.2009 (5:30 am) | Write a Comment  (5 Comments)

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jmHave you heard of John Meriwether? He was front in center in the famous collapse of Long Term Capital Management, the biggest ever hedge fund collapse losing $4.6 billion in less than 4 months because of the collapse of the Russian government bonds.
Then, just a few months ago, he was forced to close his second hedge fund after it lost 44% of its value during the recent financial crisis. You would think that would be it right? Who in their right mind would still be giving this guy their money to manage after two famous failures. It’s not like it’s not eeasy to find this information.
And yet, here we go again. John is launching a new venture, “JM Advisors management”, it will be accepting new investors in 2010. Not convinced? It will apparently be using the same relative value strategies that were used in the two previous hedge funds. The strategy tends to deliver big returns in calm and more predictable periods as it profits from mispricings between similar assets.
The problem of course is that it seems to not have much protection when markets start acting in more irrational ways. And of course to boost its returns, it uses a lot of leverage. LTCM used leverage close to 25 times its capital while his latest venture was closer to 10.
We do not yet know how to proceed to invest in the fund but will be sure to give you indications as information becomes available…. Seriously, who is crazy enough to invest their money in such managers who appear to underestimate downside risk time after time after time. And this is not a one time problem. Brian Hunter, who had a very spectacular collapse while working at Amaranth is still working in the hedge fund industry and also did not have any problems getting back in the market, with investors more than willing to give up their funds… are there not enough good managers???
Truth is, I do not have a clear answer but here are the possible reasons that I could imagine:

1-These guys did have some good returns: in fact good is probably an understatement. LTCM had achieved very impressive returns in its earlier years and had certainly showed that the strategy could work “under the right circumstances”.

2-No doubt that such smart individuals are probably to convince everyone (including themselves) that they learned from their mistakes and would be able to avoid the collapse or large loss the next time around

3- Truth is, many of these managers are so well connected that they have “believers” who will invest under almost any circumstance.

4-Finally, I think many investors know that these are home run hitters that will either get a huge return or strike out. Even the thought of missing out on some incredible returns is often enough to convince some to put up a chunk of money.

What are your thoughts? Could you imagine yourself investing in a very smart and impressive fund manager who has unfortunately suffered a couple of major losses?

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  1. Comment by Francois — October 23, 2009 @ 10:22 am

    The rise and the fall of LTCM… Although LTCM’s returns were impressive , their losses were also impressive… That’s a perfect case study, because there are lot of elements to understand. After the fall of LTCM, according to press records, there were tons of losers… it’s difficult and not easy to say that you would avoid investing in a institution that generates lots of money… especially before a collapse ( i.e. indy bancorp).

  2. Comment by Catarina — October 23, 2009 @ 10:24 am

    Can we learn from LTCM? Yes. The only way investors can repeat mistakes over and over is if they convince themselves that the same thing they are doing is in fact something different.

  3. Comment by Brian — October 28, 2009 @ 8:26 am

    There will always be people who can be easily parted with their money.

  4. […] Investors making the same mistakes over and over… : It’s no surprise that investors make mistakes, but what happens when you make the same mistakes over and over again? […]

  5. Comment by Hope To Prosper — November 3, 2009 @ 7:56 pm

    I analyzed the LTCM failure in one of my posts. One thing that struck me as a cause of that failure was the arrogance in assuming the fund would take a six sigma event to fail. I’m not a Nobel Prize winning economist, but I know that investment failure is never that much of a long-shot. don’t think these guys were nearly as smart as they thought they were.

    Of course, they are giving away Nobel Prizes to just about anyone.

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