Long Term Capital Management

Long Term Capital Management Debacle: Aug-Sep, 1998

Long Term Capital Management was a hedge fund that has impressive performance since its inception in 1994, its fund went up nearly 300% by end of 1997.

Among the partners, there were 2 Noble Prize winners. The fund attempts to make money by speculating on the interest rate spreads, using complex mathematical models and high leverage. All went well till August 1998, here's some insights...

"The hedge fund began in 1994 and enjoyed stellar returns. … In August of 1998, Russia devalued its currency and defaulted on some of the debt. This action started a chain of events over the next 4 weeks that led to devaluation in many emerging countries. … The equity in the LTCM portfolio fell from $4 billion to $0.6 billion in 1 month."

John R. Nofsinger
The Psychology of Investing

"If during August, it was possible to imagine a kind of mass panic that spread out of Russia, in September, the penny finally dropped. The market looked and saw itself in the mirror.... What finally killed LTCM over the next three weeks was the supposedly foolproof mechanism which was designed to keep the money machines running forever."

Nicholas Dunbar
Inventing Money:
The Story of Long Term Capital Management and the Legends Behind it

2000 - 2001 The Internet Bubble:

"The collapse of the Nasdaq was a turning point in American history. ... The United States is a nation of many strengths, but facing up to reality is not one of them. For almost a year and a half after the April 2000 Nasdaq, there would be a marked reluctance to accept that the long boom had come to an end. ... On Friday, Mar 9, 2001, the anniversary of the Nasdaq first closing above 5,000, the index ended the day at 2052.78. In twelve months, the total market value of companies listed on the Nasdaq had dropped from $6.7 trillion to $3.2 trillion: $3.5 trillion in stock market wealth had vanished."

John Cassidy
dot.con
The Greatest Story Ever Sold

"The 1990s were a glorious time to work on Wall Street. Between 1998 and 2000, the heart of the Internet boom, Wall Street reaped nearly $4 billion in fees for underwriting deals that involved the internet and technology, producing one of the greatest periods of wealth creation in the nation's history... the end was near, not just for the bubble, but also for the celebrated careers of the superstar analysts who helped propel the boom. For them, judgment day occurred on Mar 10, 2000, when the symbol of the New Economy, the NASDAQ stock market index, rose above the 5,000 level, nearly double what it was a year before. From then on, it was all downhill... In just three months since the NASDAQ peak, the market had fallen more than 1,500 points to about 3,400, wiping out hundreds of billions in wealth."

Charles Gasparino
Blood on the Street
The Sensational Inside Story of How Wall Street Analysts Duped a Generation of Investors

"During the high-growth era of the 1990s, it was almost bad taste to speak of dividends. These were for stodgy old bricks-and-mortor establishments that had not shifted their operations to the Web yet. Hip CEOs would not think of parting with so much as a nickel of their companies' earnings. They even disdained to speak of earnings, period. It was all about gaining market share. Now that these stocks have blown up in people's faces like exploding cigars, the mood is shifting to one of nostalgia for old-fashioned money."

Ben Stein & Phil DeMuth
Yes, You Can Time The Market

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