When Genius Fails
I have been reading the famous book When Genius Failed: The Rise and Fall of Long-Term Capital Management. This was written in 2000 by Roger Lowenstein, who was a journalist and writer for the Wall Street Journal, and a keen mind. The book and couple of independent conversations triggered this thought process and the post. A friend who is my co-worker for a fortune 500 company, an extremely smart individual and geoscientist, yesterday confided in me that he is nearly broke, and is seriously worried about his two kids, son and daughter, who are both in Universities. First of all, I am quite certain, 'being broke' is a feeling to him mostly and anxiety, and not reality at 100%. This is simply because that he is a salaryman, and get paid a lot. Yet, the perception is real, because his daughter is at a residential university at Madrid, and his son goes to Texas A&M, which is an excellent school, but together they are expensive. I also learned that he never had a college savings plan for his kids (in US it is called the 529 plan). Wow! He got divorced a couple of years back, and got re-married and a new born. So you can imagine, that his life is stressful, and suddenly he is feeling overwhelmed at a ripe age with a new born and a two college kids at the same time.
Generated by Leonardo
These whole preamble got me in thinking that we are conditioned to believe that brilliance is the ultimate insurance policy. This friend of mine is very smart and we regarded along his peers. When facing a complex problem—be it an engineering challenge, a scientific equation, or a financial investment—we instinctively trust the person with the highest IQ, the most degrees, or the deepest technical expertise. We assume a mind capable of seeing patterns others miss will surely succeed where the rest of us falter. Yet, when we step into the chaotic, psychological arena of business and investment, this assumption collapses. It is here that the greatest minds often commit the most spectacularly bone-headed mistakes, proving that a high intelligence quotient is no match for market volatility and human emotion.
Generated by Leonardo
The most stunning historical evidence of this paradox belongs to the man who literally defined the laws of the universe. I mentioned this story to multiple people and I find it fascinating. Sir Isaac Newton, the genius who gave us calculus and the theory of gravity, couldn't figure out when to sell a speculative stock. In 1720, Newton held shares in the infamous South Sea Company—a classic, wildly overvalued bubble. He initially sold his shares for a tidy profit, sensing the frenzy was getting out of hand. But watching his friends and peers continue to make fortunes, his scientific logic was overridden by FOMO (Fear of Missing Out). He reinvested a massive sum, only to see the bubble burst months later, reportedly losing the equivalent of millions of dollars in modern currency. His famous lament—“I can calculate the motion of heavenly bodies, but not the madness of people”—serves as the perfect epitaph for the brilliant investor who gets caught in a trap of their own making.
LTCM: The Perfect Modern Example
Long-Term Capital Management is the perfect case study to follow because in that case, it was not a single individual. Also, it was not merely an intelligent team, but a financial supergroup built on the pinnacle of pure quantitative logic:
Amazon link, if you like to buy the book
The Geniuses:
LTCM's partnership included two Nobel Laureates in Economics, Myron Scholes and Robert C. Merton (known for the Black-Scholes options pricing model), alongside John Meriwether, a legendary bond trader from Salomon Brothers, and a team of PhDs.
The Certainty:
They used complex mathematical models to execute "arbitrage" trades, betting on the idea that highly specific price differences between related bonds would converge over time. They believed their models had virtually deconstructed risk.
The Flaw:
Their models were based on historical data and assumed markets behaved according to a normal distribution. However, they failed to account for a "Black Swan" event (the 1998 Russian default) and the subsequent mass panic and liquidity flight. During the crisis, all their supposedly "uncorrelated" trades moved against them simultaneously.
The Scale of Failure:
Due to extreme leverage (at one point controlling over $100 billion with only a few billion in capital), the fund lost over $4 billion in less than four months and required an unprecedented $3.6 billion bailout orchestrated by the Federal Reserve to prevent a wider systemic collapse.
If you don't feel inclined to read the book, here is a great simple video that does a decent job.
The moral of this story is just like Newton's flawless celestial mechanics failed to predict the "madness of people," LTCM's flawless mathematics failed to account for a simple, ugly reality: The market can remain irrational longer than you can remain solvent (one of my favorite quote by John Maynard Keynes).
At Hive
Today at hive we have seen many small time "leveraged" actions by individuals or group of people. All of them have failed or will fail. There is no if or but; THEY WILL FAIL. One recent project that bothers me is Leostrategy. I am not going to tag them to give them any publicity, but their action worry me. They are trying to sell Tesla stock as a leveraged bet to god knows who (Nigerians? Venezuelans?)! Other than complete lunatic or poor people, who can't buy TSLA through a brokerage account, who will buy a leveraged bet from a couple of self proclaimed smart guys?
Also just because you are smart doesn't mean you will be a good investor. The best you can be is a swindler. Please stay away from any leverage scheme that promise you to make money. The only promise there is that the project lines up the pockets for the founders. This is not just true for that project but every other "get-rich-quick" crypto project.
