On September 23, 1998, the hedge fund Long Term Capital Management was bailed out by a total of 14 banks. The book "When Genius Failed" chronicles this story in detail.

The bailout of Long-Term Capital Management (LTCM) in 1998 was an unprecedented event in the financial markets. This hedge fund, comprised of some of the world's most brilliant economists, was on the verge of collapse due to its colossal losses. The magnitude of this systemic risk forced the U.S. Federal Reserve to intervene, organizing a bailout involving major Wall Street investment banks.

Why was a rescue necessary?

• Systemic risk: LTCM had accumulated such a large risk position that its failure could have triggered a global financial crisis. LTCM's interconnected markets and high degree of leverage meant that its downfall could have a domino effect on other market players.
• Financial contagion: LTCM's counterparties, i.e., the banks and other financial institutions with which it had conducted transactions, could have suffered significant losses, jeopardizing its solvency.
• Loss of confidence: A crisis of this magnitude could have undermined investor confidence in the financial system as a whole, potentially leading to a credit crunch and an economic recession.

How was the rescue carried out?

The New York Federal Reserve, under the direction of William McDonough, played a crucial role in organizing the rescue. A consortium of 14 banks was established, which provided capital to recapitalize LTCM and allow it to liquidate its positions in an orderly manner.This process was extremely delicate, as it sought to avoid a panic in the markets and minimize disruptions to the financial system.

The consequences of the rescue

The bailout of LTCM had several important consequences:

LTCM Legacy: The LTCM story became a classic case study in business schools and the financial industry, serving as a warning about the dangers of overconfidence, excessive leverage, and the importance of risk management.

Preventing a major crisis: A systemic financial crisis that could have had devastating consequences for the global economy was averted.

Questioning financial models: The failure of LTCM called into question the reliability of the mathematical models used by financial institutions and the importance of considering "tail" risks (extreme and unexpected events).

Greater regulation: The event prompted increased regulation of hedge funds and other financial market players, with the goal of improving transparency and reducing systemic risks.

When Genius Failed: The Book That Portrays the Rise and Fall of Long-Term Capital Management

This book by Roger Lowenstein tells the story of Long-Term Capital Management (LTCM), a hedge fund that, despite being staffed by some of Wall Street's most brilliant economists, including several Nobel Prize winners, suffered a spectacular fall in 1998.

The Rise of Long-Term Capital Management:

• Dream team: LTCM had a management team comprised of former executives from major investment banks and renowned academics. Their approach was based on highly sophisticated mathematical models to identify arbitrage opportunities in financial markets.
• Initial successes: During its early years, LTCM achieved extraordinary returns, thanks to the accuracy of its models and its ability to leverage financial resources.
• Reputation and trust: LTCM's reputation attracted large amounts of capital from institutional investors, making it one of the largest and most respected hedge funds in the world.

The Fall of Long-Term Capital Management:

• Overconfidence: Initial success led to overconfidence in the models and the team's ability to predict market movements.
• Excessive leverage: LTCM used extremely high financial leverage, which amplified both gains and losses.
• Unforeseen events: In 1998, a series of unexpected events, including the Asian financial crisis and the Russian debt crisis, put LTCM models to the test and revealed their limitations.
• Catastrophic losses: LTCM's models failed to anticipate the magnitude of these events, leading to massive losses and the fund's inability to meet its obligations.
• Government bailout: To avoid a systemic financial crisis, the US Federal Reserve organized a bailout of LTCM, with major investment banks injecting capital into the fund.

Lessons Learned:

• Limitations of the models: Even the most sophisticated mathematical models cannot predict all possible events in financial markets.
• Leverage risk: Excessive use of leverage can amplify losses and jeopardize a company's survival.
• Importance of risk management: Robust risk management systems are essential to identify and mitigate potential risks.
• Arrogance and overconfidence: Arrogance and overconfidence can lead to bad decisions and catastrophic losses.

Importance of the Book When Genius Failed:

"When Genius Failed" is a must-read for anyone interested in financial markets, risk management, and investment psychology. The book offers a fascinating look at the rise and fall of one of history's most famous hedge funds, and its lessons remain relevant today.

In summary, "When Genius Failed" shows us that even geniuses can make mistakes and that the combination of sophisticated models, overconfidence and excessive leverage can lead to disastrous results.

Both you and your company can also invest in quality companies.

Getting the best financing for your business isn't easy. And you're also focused on improving your business, so financial matters can be difficult. Don't worry, we're here to help.
With the Financial Optimization Program From El Inversor de Bolsillo®, we evaluate the company and give you specific suggestions to optimize the performance of your current balances and reduce your interest burden. We help you manage the registration in a Reciprocal Guarantee Society and get the best rates on the market. After the three free months have passed, a set number of monthly hours of financial consulting is provided.

In the Financial Mentoring With El Inversor de Bolsillo® you can learn while you invest, and we'll guide you according to your needs. Financial consulting for individuals includes one-on-one advisory sessions, online courses, stock market reports and everything you need to your investment is a success, so much investing in Argentina as in any other part of the world.
There are different monthly plans of according to your circumstances and your budgetThe most important thing is that whichever plan you choose, you'll never be aloneWe will accompany you in your learning so that you can invest successfully.

If you want to learn more about how to invest risk-free, visit our website. www.elinversordebolsillo.com.ar either our YouTube channel.

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On September 2, 1998, John Meriwether, president of LTCM (Long Term Capital Management), sent a letter to his investors stating that the fund had lost $2.5 billion that year. Let's look at the full story of the rise and fall of this giant investment fund.

La quiebra de Long-Term Capital Management (LTCM) en 1998 es uno de los episodios más emblemáticos de la historia financiera moderna. Este fondo de cobertura, liderado por algunos de los nombres más brillantes del mundo académico y financiero, prometía revolucionar la inversión mediante estrategias cuantitativas sofisticadas. Sin embargo, su espectacular colapso no solo sacudió los mercados globales, sino que también dejó lecciones perdurables sobre los riesgos de la especulación, el apalancamiento excesivo y la confianza ciega en modelos matemáticos. En este artículo, exploraremos en detalle la génesis de LTCM, su ascenso meteórico, las razones detrás de su caída y las consecuencias que tuvo para el sistema financiero mundial.

Orígenes de LTCM: Un sueño de genios financieros

Long-Term Capital Management fue fundado en 1994 por John Meriwether, un exejecutivo estrella de Salomon Brothers, conocido por su habilidad para liderar equipos de trading de alto rendimiento. Meriwether reunió a un grupo de élite que incluía a dos premios Nobel en Economía, Myron Scholes y Robert Merton, célebres por desarrollar el modelo Black-Scholes para la valoración de opciones. También formaban parte del equipo otros matemáticos, economistas y traders de renombre, lo que convirtió a LTCM en un «dream team» financiero.

La premisa de Long Term Capital Management era simple pero ambiciosa: utilizar modelos matemáticos avanzados para identificar pequeñas ineficiencias en los mercados financieros y explotarlas mediante estrategias de arbitraje. Estas estrategias se enfocaban en mercados de bonos, derivados y divisas, buscando diferencias mínimas en los precios de activos relacionados que, en teoría, debían converger con el tiempo.

Para maximizar las ganancias, LTCM empleaba un apalancamiento extremo, lo que significa que tomaba préstamos masivos para amplificar el impacto de sus operaciones. En sus primeros años la estrategia fue un éxito rotundo. Entre 1994 y 1997, el fondo generó retornos anuales promedio superiores al 40%, atrayendo a inversores institucionales, bancos y personas de alto patrimonio. Su cartera inicial de 1.25 mil millones de dólares creció rápidamente, y su reputación como un fondo imbatible se consolidó. Sin embargo, esta aparente invencibilidad escondía riesgos que pronto se harían evidentes.

La estrategia de LTCM: Arbitraje y apalancamiento

El enfoque principal de LTCM era el arbitraje de convergencia, una estrategia que buscaba aprovechar las discrepancias temporales en los precios de activos financieros similares. Por ejemplo, LTCM podría comprar bonos del Tesoro estadounidense a largo plazo mientras vendía en corto bonos a corto plazo, apostando a que la diferencia de precios entre ambos se reduciría con el tiempo. Estas operaciones generaban márgenes de beneficio muy pequeños, pero el uso de un apalancamiento masivo (en algunos casos, de 25 a 30 veces el capital propio) permitía transformar esas pequeñas ganancias en retornos significativos.

El éxito de estas estrategias dependía de dos supuestos clave: primero, que los mercados financieros eran eficientes a largo plazo y que las discrepancias de precios eventualmente desaparecerían; segundo, que los modelos matemáticos de LTCM podían predecir con precisión el comportamiento de los activos. Sin embargo, estos supuestos no tomaban en cuenta eventos extremos o «cisnes negros», como los llamó más tarde Nassim Nicholas Taleb, un crítico de los modelos cuantitativos. Además, LTCM diversificó sus operaciones más allá del arbitraje de bonos, incursionando en mercados emergentes, divisas y acciones. Esta expansión aumentó su exposición a riesgos sistémicos, especialmente en un contexto de creciente volatilidad global.

El contexto global de 1998: Tormentas financieras

La caída de LTCM no puede entenderse sin considerar el contexto económico global previo a 1998. Ese año estuvo marcado por una serie de crisis financieras internacionales que desestabilizaron los mercados. La crisis asiática, que comenzó en 1997 con la devaluación del baht tailandés, se extendió a países como Indonesia, Malasia y Corea del Sur, generando pánico en los mercados emergentes. Los inversores, temerosos de pérdidas, comenzaron a vender activos de riesgo y a buscar refugio en activos seguros, como los bonos del Tesoro estadounidense.

En agosto de 1998, Rusia sorprendió al mundo al devaluar el rublo y declarar una moratoria sobre su deuda externa. Este evento desencadenó una fuga masiva de capitales de los mercados emergentes y una aversión al riesgo generalizada. Los diferenciales de precios (spreads) entre activos seguros y riesgosos, que LTCM asumía que convergerían, comenzaron a ampliarse de manera imprevista. Las estrategias de arbitraje del fondo, que dependían de la estabilidad y la predictibilidad, se volvieron insostenibles.

La crisis de LTCM: Un colapso en cámara lenta

A medida que los mercados globales se volvían más volátiles, las posiciones de LTCM comenzaron a sufrir pérdidas significativas. En agosto de 1998, el fondo perdió aproximadamente el 44% de su capital, una caída devastadora para un fondo que había sido considerado intocable. La combinación de apalancamiento extremo y exposición a mercados volátiles amplificó estas pérdidas. Por ejemplo, una posición que representaba una apuesta de 1 dólar podía generar pérdidas de 25 dólares o más debido al apalancamiento.

El problema no era solo la magnitud de las pérdidas, sino la interconexión de LTCM con el sistema financiero global. El fondo había tomado préstamos de los principales bancos de inversión, como Goldman Sachs, Morgan Stanley y JPMorgan, y sus operaciones estaban profundamente entrelazadas con los mercados de derivados.

Si LTCM colapsaba, podría desencadenar un efecto dominó que pondría en riesgo a sus contrapartes financieras y, potencialmente, al sistema bancario en su conjunto. A medida que las pérdidas se acumulaban, LTCM enfrentó una crisis de liquidez. Los bancos comenzaron a exigir garantías adicionales (margin calls), pero el fondo no tenía suficiente efectivo para cumplir con estas demandas. Los inversores, por su parte, comenzaron a retirar su capital, lo que agravó aún más la situación.

La intervención del gobierno y el rescate

A finales de septiembre de 1998, la situación de LTCM era insostenible. El fondo estaba al borde de la quiebra, con pérdidas acumuladas de más de 4 mil millones de dólares y un capital propio reducido a menos de 400 millones. La Reserva Federal de Nueva York, liderada por William McDonough, reconoció que el colapso de LTCM podía tener consecuencias catastróficas para los mercados globales. Aunque LTCM era un fondo privado, su tamaño y su interconexión con los bancos más importantes lo hacían «demasiado grande para quebrar».

El 23 de septiembre de 1998, la Fed organizó una reunión de emergencia con los principales bancos de Wall Street. Tras intensas negociaciones, 14 instituciones financieras, incluyendo Goldman Sachs, Morgan Stanley y Barclays, acordaron inyectar 3.65 mil millones de dólares en LTCM a cambio de una participación del 90% en el fondo. Este rescate permitió estabilizar a LTCM y evitar un colapso inmediato, pero marcó el fin de su independencia. El fondo fue liquidado gradualmente en los años siguientes, y sus socios originales perdieron el control.

Es importante destacar que el rescate no involucró fondos públicos, sino que fue una operación coordinada entre bancos privados bajo la supervisión de la Fed. Sin embargo, la intervención generó controversia, ya que muchos críticos argumentaron que rescatar a LTCM sentó un precedente peligroso, fomentando el «riesgo moral» al sugerir que las instituciones financieras arriesgadas serían salvadas en el futuro.

Lecciones de la caída de LTCM

La quiebra de LTCM dejó varias lecciones fundamentales para los mercados financieros, los reguladores y los inversores:

1. Límites de los modelos matemáticos

Los modelos cuantitativos de LTCM, aunque sofisticados, no pudieron prever eventos extremos como la crisis rusa o la aversión al riesgo generalizada. Esto destacó la importancia de incorporar el riesgo de «cisnes negros» en las estrategias de inversión.

2. Peligros del apalancamiento

El uso excesivo de deuda amplificó tanto las ganancias como las pérdidas de LTCM. Cuando los mercados se volvieron contra el fondo, el apalancamiento convirtió pequeñas pérdidas en un colapso catastrófico.

3. Riesgo sistémico

La interconexión de LTCM con los bancos y los mercados de derivados mostró cómo el colapso de una sola entidad puede amenazar la estabilidad del sistema financiero global. Esto llevó a un mayor escrutinio de los fondos de cobertura y sus relaciones con los bancos.

4. Importancia de la liquidez

La crisis de LTCM demostró que incluso las estrategias más sólidas pueden fracasar si no hay suficiente liquidez para cumplir con las demandas de los acreedores.

5. Riesgo moral

El rescate de LTCM generó debates sobre si las instituciones financieras deberían ser salvadas en situaciones de crisis, especialmente cuando sus problemas son el resultado de decisiones arriesgadas.

El legado de LTCM

La caída de LTCM tuvo un impacto duradero en los mercados financieros. En el corto plazo, llevó a una mayor regulación de los fondos de cobertura y a un enfoque más cuidadoso hacia el apalancamiento y los derivados. Los bancos comenzaron a implementar pruebas de estrés más rigurosas para evaluar su exposición a riesgos sistémicos. Además, la crisis de LTCM sirvió como un precursor de la crisis financiera de 2008, cuando problemas similares de apalancamiento y derivados desencadenaron una recesión global.

A nivel académico, la caída de LTCM cuestionó la confianza ciega en los modelos financieros y abrió la puerta a nuevas teorías, como las de Nassim Taleb, que enfatizan la imprevisibilidad de los mercados. También inspiró libros como *When Genius Failed* de Roger Lowenstein, que narra la historia de LTCM y se ha convertido en una lectura obligada para los profesionales del sector financiero. En el ámbito de los fondos de cobertura, LTCM marcó un punto de inflexión. Aunque los hedge funds continuaron prosperando, los inversores se volvieron más cautelosos, exigiendo mayor transparencia y una mejor gestión de riesgos. Los reguladores, por su parte, comenzaron a prestar más atención a las instituciones que podrían representar un riesgo sistémico.

Conclusion

La historia de Long-Term Capital Management es un recordatorio de que incluso los mejores planes, respaldados por las mentes más brillantes, pueden fracasar si no se toman en cuenta los riesgos imprevistos. LTCM fue un experimento audaz que combinó el genio académico con la ambición financiera, pero su colapso mostró los peligros de la arrogancia intelectual y la dependencia excesiva de modelos matemáticos.

A más de dos décadas de su caída, las lecciones de LTCM siguen siendo relevantes, especialmente en un mundo donde los mercados financieros son cada vez más complejos e interconectados. La caída de la empresa no solo cambió la forma en que los inversores y reguladores ven los fondos de cobertura, sino que también sirvió como una advertencia sobre los límites de la predicción y el control en los mercados financieros. En última instancia, la historia de LTCM es una lección de humildad: ni los genios ni los modelos perfectos pueden garantizar el éxito en un mundo lleno de incertidumbre. –

Both you and your company can also invest in quality companies.

Getting the best financing for your business isn't easy. And you're also focused on improving your business, so financial matters can be difficult. Don't worry, we're here to help.
With the Financial Optimization Program From El Inversor de Bolsillo®, we evaluate the company and give you specific suggestions to optimize the performance of your current balances and reduce your interest burden. We help you manage the registration in a Reciprocal Guarantee Society and get the best rates on the market. After the three free months have passed, a set number of monthly hours of financial consulting is provided.

In the Financial Mentoring With El Inversor de Bolsillo® you can learn while you invest, and we'll guide you according to your needs. Financial consulting for individuals includes one-on-one advisory sessions, online courses, stock market reports and everything you need to your investment is a success, so much investing in Argentina as in any other part of the world.
There are different monthly plans of according to your circumstances and your budgetThe most important thing is that whichever plan you choose, you'll never be aloneWe will accompany you in your learning so that you can invest successfully.

If you want to learn more about how to invest risk-free, visit our website. www.elinversordebolsillo.com.ar either our YouTube channel.

See more notes from our blog:

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On August 27, 1998, the Russian market collapsed completely: the main index fell by 171% on that day alone, adding to a catastrophic year-on-year decline of 841% on the same day. Find out what happened.

He August 27, 1998, the world's financial markets experienced one of the most tense episodes of the 1990s, marked by a collapse that reflected the fragility of the global financial system in the face of a series of interconnected events. This day, known as the "mini-crash of August 1998," was profoundly influenced by the financial crisis in Russia, the impact of hedge funds as Long-Term Capital Management (LTCM) and the persistent fear of global contagion.

Background: A vulnerable system

The Russian market crash and its global impact in August 1998 did not happen out of nowhere. It was the result of a combination of regional crises, institutional failures, and inherent vulnerabilities in the global financial system.

1. The Asian financial crisis of 1997

A year earlier, Asian markets had collapsed due to problems related to currency overvaluation, real estate bubbles, and unsustainable trade deficits. Countries like Thailand, Indonesia, and South Korea were particularly hard hit, triggering a crisis that put the global financial system in jeopardy.

Although the Asian crisis had begun to subside by 1998, its aftereffects remained, with the global financial system already weakened and more sensitive to further shocks.

2. La crisis ecónomica

The most immediate trigger for the market collapse in August 1998 was the financial crisis in Russia.

• Economic context in RussiaFollowing the collapse of the Soviet Union, Russia experienced a chaotic economic transition to capitalism, characterized by corruption, hyperinflation, and a weak institutional foundation. By 1998, the country was heavily dependent on domestic debt issuance and oil export revenues.
• The impact of oil pricesIn 1998, oil prices reached historic lows, drastically reducing Russian government revenues.
• Default and devaluationOn August 17, 1998, Russia announced that it would be unable to meet its internal debt payments and decided to devalue the ruble. This event sparked panic in international markets.

3. Long-Term Capital Management (LTCM)

The market collapse in August 1998 also highlighted the fragility of highly leveraged investment funds, LTCM An emblematic case. This fund, run by prominent economists, including Nobel Prize winners, had made massive bets based on mathematical models that assumed market stability.

As global markets began to collapse, LTCM suffered catastrophic losses, increasing panic in the global financial system.

The collapse of the Russian and global markets on August 27, 1998

Thursday August 27, 1998Global markets reacted sharply to the growing financial tensions. Stock markets in Asia, Europe, and the Americas experienced significant declines.

1. Fall of international stock markets

• On Wall Street, the index Dow Jones Industrial Average fell 3.5%, one of the biggest drops of the year.
• In Europe, major stock markets recorded similar losses, with key indices such as London's FTSE 100 and Germany's DAX falling from 41Q3 to 51Q3.
• Asian markets, already weakened by the 1997 financial crisis, suffered even sharper declines, reflecting the growing perception of risk in emerging economies.
• The Russian market itself collapsed, falling 17% on the day and accumulating a fall to that point of the year of 84%.

2. Impact on bond and currency markets

• U.S. Treasury bonds, considered a safe haven, experienced increased demand, leading to a decline in their yields.
• In the currency markets, currencies such as the Japanese yen and the Swiss franc strengthened, while emerging market currencies, including the Russian ruble, faced strong selling pressure.

3. Capital flight in emerging markets

International investors began withdrawing capital from emerging markets, fearing that the Russian crisis could spread to other economies. This phenomenon, known as financial contagion, particularly affected countries in Latin America and Asia.

Structural causes of the collapse

The crash of August 27, 1998, was the result of a combination of interconnected factors:

1. Domino effect of the Russian crisisRussia's inability to meet its debt obligations has raised fears of global contagion, especially to other emerging markets.
2. Fragility of leveraged fundsThe LTCM case highlighted the risks associated with over-reliance on leverage and mathematical models in financial markets.
3. Excess debt in emerging marketsMany countries relied on foreign capital inflows to finance deficits, making them vulnerable to changes in investor confidence.

Response of central banks and regulators

Faced with the market collapse, central banks and international regulators intervened to contain the crisis and prevent a systemic collapse.

• United States Federal ReserveThe Fed, led by Alan Greenspan, cut interest rates several times during the second half of 1998 to stimulate the economy and stabilize markets.
• LTCM RescueIn September 1998, the Fed led a joint effort by several banks to rescue LTCM, preventing a collapse that could have had catastrophic implications for the global financial system.

Long-term consequences

The market crash of August 1998 left important lessons for the global financial system:

1. Increased supervision of leveraged fundsRegulators have begun to pay more attention to the risks associated with excessive leverage in investment funds.
2. Reforms in emerging marketsMany developing countries adopted policies to reduce their dependence on external debt and improve the stability of their financial systems.
3. Change in risk perceptionInvestors became more cautious about emerging economies, leading to a reassessment of the risks associated with these markets.

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Global impact and recovery

Despite the initial shock, global markets gradually recovered thanks to central bank interventions and improved global economic conditions.

• USAThe US economy continued to expand in the following years, driven by a technology boom and productivity growth.
• Emerging marketsAlthough some countries faced persistent difficulties, many managed to stabilize their economies and attract new investment flows.

Conclusion: A reminder of financial interconnectedness

The market crash of August 27, 1998, underscored the vulnerability of the global financial system to regional crises and institutional failures. As markets have become more interconnected, events like this highlight the importance of international cooperation, adequate supervision, and preparedness to confront future crises.

Although the global financial system has evolved since then, the 1998 episode remains a crucial reminder of the risks inherent in markets and the need for resilience in times of uncertainty.

At El Inversor de Bolsillo we can help you invest in quality companies.

In the Financial Mentoring With El Inversor de Bolsillo® you can learn while you invest, and we'll guide you according to your needs. Financial consulting for individuals includes one-on-one advisory sessions, online courses, stock market reports and everything you need to your investment is a success, so much investing in Argentina as in any other part of the world.
There are different monthly plans of according to your circumstances and your budgetOur plans are very affordable. The most important thing is that whichever plan you choose, you'll never be aloneWe will accompany you in your learning so that you can invest successfully.

Getting the best financing for your business isn't easy. And you're also focused on improving your business, so financial matters can be difficult. Don't worry, we're here to help.
With the Financial Optimization Program From El Inversor de Bolsillo®, we evaluate the company and give you specific suggestions to optimize the performance of your current balances and reduce your interest burden. We help you manage the registration in a Reciprocal Guarantee Society and get the best rates on the market. After the three free months have passed, a set number of monthly hours of financial consulting is provided.

If you want to learn more about how to invest risk-free, visit our website. www.elinversordebolsillo.com.ar either our YouTube channel.

See more notes from our blog:

Aeronautics saving Apple Financial Advisor banks Berkshire Hathaway Stock market bonds bubble Dot-com bubble byma commodities South Sea Company Financial advice Cryptocurrencies crisis subprime crisis free finance course economy Start investing pyramid scheme USA Facebook finance Personal finances IBM inflation England finance books investment books LTCM financial mentoring Argentine market stock market international market Meta Microsoft Nasdaq Oil Russia Steve Jobs Technology value investing Wall Street Warren Buffett

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Let's analyze the biggest mistakes investors can make. In this article, we'll see how pride and anger can cause us to lose a lot of money, as happened to Blockbuster and Long-Term Capital Management.

Since the Middle Ages, the Catholic Church has grouped the most common human faults, calling them "deadly sins," as they were practices contrary to Christian teachings. Similarly, investors can also fall into these types of sins, or faults. Of course, they are not exactly the same, but they can cause us to lose a lot of money. And we must be cautious, because, as we will see, these are not mistakes typical of novices. Often, highly qualified and respected people can commit them. Let's see what they are.

First deadly sin: pride

Arrogance is defined as an excessive self-esteem, believing oneself to be better than others. It's closely related to pride, but even worse, as its purpose is to satisfy one's vanity. In general, successful people tend to be very arrogant, although there are notable exceptions. And in the world of investment, arrogance can be fueled by success after success, but when a mistake is made, the market quickly accommodates it.

This is what happened about 20 years ago. For those born in this millennium, I'm going to tell you things you might not know. When you got together with friends or family and wanted to entertain yourself at home, you went to the nearest video store and rented a movie. Aside from the local video stores, there were larger chains with an incredible collection of movies for all tastes. The great example in this regard was Blockbuster. By 2004, it had more than 9,000 stores worldwide.

But before that, some rather curious events occurred. A regular customer named Reed Hastings forgot to return his VHS.[1] and had to pay a $40 penalty. This seemed absurd to him... and he planned to launch a new business model similar to Blockbuster, but based on a monthly fee. By 1997, a company that will be quite familiar to us was born: Netflix.

Blockbuster's reign is threatened

By early 2000, in the midst of the transition from VHS to DVD, Blockbuster was the undisputed star. Warner Bros. had even offered it an exclusive deal for its films that meant the rental company would keep 60% of the profits.

On the other hand, Netflix, which had started as a DVD rental service mailed to every home, devised a new business: becoming an online video store, with the advantage of not having many employees or physical stores. To counter this, Blockbuster created the Total Access platform, which allowed customers to rent movies both in physical stores and online. New customers clearly preferred it: a 70% went to Blockbuster, and only a 30% to Netflix.

The incredible rejection

By 2000, Hastings met with John Antiochus, CEO of Blockbuster, and proposed a partnership so the two companies could work together. He offered to sell his company for $50 million. Antiochus found the offer ridiculous, dismissing it as a capitulation and a bit of a joke. He reportedly died laughing after leaving the meeting.

Back then, and especially until 2004, things seemed to be going well for Blockbuster. However, the company had several weaknesses that began to come to light: they relied heavily on penalties from people who delivered their movies late, and their online platform was loss-making.

By 2007, due to a conflict with one of the majority shareholders, Antiochus left his position and was replaced by James Keyes, another key executive at the company. He pursued a different strategy, seeking to diversify the movie offerings with candy, fast food, and snacks. He even went so far as to say that "Netflix is not on the radar screen in terms of competition."

We know the end of the story well: by 2013, Blockbuster had folded and disappeared[2]. Today, Netflix's stock market valuation is over $300 billion… that opportunity wasted by hubris prevented them from multiplying their investment no less than 4,000 times!

Second deadly sin: anger

Anger is a fairly common feeling for investors. You do research, analysis, and calculations, hoping the market will go in your favor. But often, this doesn't happen. Time passes, and the market continues to go against you. This generates in many investors an intense hatred for a stock, even leading them to believe that the stock knows we own it and that's why it's not going up.

Believe me, it's happened to me and many other investors. But remember, stocks don't have feelings: they don't suffer because they're cheap, nor do they gloat over others when they rise. If you want to have a laugh by calling stocks names, like "it's a mummy," "it's a POT," "we're POT-ed," go for it, but only for a laugh.

Selling stocks simply because you're angry with them isn't wise advice. It's best to conduct a cold, rational analysis of your target price and stick to it. Otherwise, anger may lead you to double down.

Long-Term Capital Management: the Dream Team

By 1994, a new giant had formed in the world of hedge funds. We're talking about Long-Term Capital Management. And when we say giant, it's because it was formed by some of the biggest names in finance. The founder was John Meriwether, former vice president and head of bond sales at Salomon Brothers. The board of directors included people like Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Prize in economics for their method for valuing financial derivatives.[4]

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The business was quite unique and narrow-margin. They looked for correlated bonds that had differences in valuation, so they built long positions in the cheapest and short positions in the most expensive. The goal was to narrow that difference. Of course, the margin wasn't high, so they used a lot of leverage, or debt, to maximize profits. This reached 100 to 1 at times.

For 1995 and 1996, the fund's performance was excellent: a 401% return on investment. The following year, it fell slightly, but was still very good: a 271% return on investment. Since they weren't finding any business opportunities, they returned more than a third of the fund. However, they were still a giant fund: they managed a 51% return on investment in global fixed income.

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Things are not going as expected.

But 1998 was a difficult year. In May and June, mortgage debt problems caused some bonds to fall, resulting in losses for the 161st quarter. But by August, things had gotten worse, as the crisis in Russia prompted many investors to "flight to quality."[5]

The spreads between the bonds they arbitraged used to move 2 or 3 points in a few days, but on August 21, 1998, they moved 21 points. That meant a loss of 550 million for the fund. According to their arithmetic calculations, it was a 1 in 1 billion event... yet it happened!

As things got complicated and fresh funds were scarce (probably angry at the market), investors went back to the market to borrow money to cover their losing positions. However, fear began to take hold among investors as they realized there was a good chance they wouldn't be able to recover their money, since leverage had reached extremely high levels. Finally, the United States Federal Reserve intervened by bailing out 14 banks. The fund that had made so much money ended up losing $4.6 billion in just four months.[6] They undoubtedly had reasons to be angry, but the stock market doesn't know who's buying and selling, and it doesn't hold grudges against its owners.

[1] For the younger ones, think of a flash drive with a movie on it. It was a cassette with a tape that allowed you to watch movies. If you finished watching it, you had to rewind it, that is, move the entire tape back to the beginning. It took a few minutes.

[2] Source:https://www.forbes.com/sites/gregsatell/2014/09/05/a-look-back-at-why-blockbuster-really-failed-and-why-it-didnt-have-to/?sh=495d07db1d64

[3] All nicknames given to Central Puerto, a company that started trading on Wall Street in a range of 16 to 21 dollars but recently reached 2 dollars.

[4] Yes, they are from the Black-Scholes method, which allows the value of call and put options to be calculated. I continue to insist that these are topics I do not wish to go into in depth, as it would be a source of confusion for both you and I.

[5] “Flight to quality” is a movement that occurs when a crisis is expected. Almost all funds sell positions in bonds or stocks that they consider risky and buy US bonds, as they consider them safer. This causes price falls. Argentina, for example, suffered greatly from this movement worldwide in 2018, and it was one of the causes of the significant devaluation of its currency.

This article is part of Chapter 4 of the book "The Pocket Investor Three: Investing for Life." You can purchase it in our store.

Below you can find the other two notes:

Both you and your company can also invest in quality companies.

In the Financial Mentoring With El Inversor de Bolsillo® you can learn while you invest, and we'll guide you according to your needs. Financial consulting for individuals includes one-on-one advisory sessions, online courses, stock market reports and everything you need to your investment is a success, so much investing in Argentina as in any other part of the world.
There are different monthly plans of according to your circumstances and your budgetThe most important thing is that whichever plan you choose, you'll never be aloneWe will accompany you in your learning so that you can invest successfully.

Getting the best financing for your business isn't easy. And you're also focused on improving your business, so financial matters can be difficult. Don't worry, we're here to help.
With the Financial Optimization Program From El Inversor de Bolsillo®, we evaluate the company and give you specific suggestions to optimize the performance of your current balances and reduce your interest burden. We help you manage the registration in a Reciprocal Guarantee Society and get the best rates on the market. After the three free months have passed, a set number of monthly hours of financial consulting is provided.

If you want to learn more about how to invest risk-free, visit our website. www.elinversordebolsillo.com.ar either our YouTube channel.

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• Back to the Future Day: What Investors Can Learn from the Memorable SagaOctober 21st is a very special day for fans of the series (including the author): in the second part of the film, they travel back to that day in 2015. Let's see what investors can learn from this magnificent saga.
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• The Forgotten Panic of 1907 and Its Shocking LegacyOctober 18, 1907, saw the fourth consecutive day of stock market crashes. This crisis became known as the "Panic of 1907" or the "Crisis of 1907." The newly listed Westinghouse fell from 103 to 79 in a single day, and its stock price had to be suspended.
• Mirgor: 41 years since the birth of the incredible Fuegian companyOn October 17, 1983, Nicolás Caputo, Roberto Vázquez, and Mauricio Macri (the former president) founded Mirgor. Let's take a look at the full story of this innovative company from Tierra del Fuego.
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• New Program: Finance for FamiliesThe Family Finances program is designed to help you organize your household finances. We can help you set concrete goals so that money is no longer a problem or a topic of discussion.
• RainbowEx and their incredible "Homer Simpson-style" exitYesterday, October 13, RainbowEx announced that to recover their money, investors must pay $88 to open a "new account." It sounds like a Homer Simpson-esque remark: "Well, by digging."

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