Low risk – high returns: is it a problem?

In the words of Prof. Myron Scholes, “Well, our (LTCM’s) goal is to get the risk level of S&P 500. We are having trouble having it that big.”

The problem Long Term Capital Management (LTCM) was not about getting enough returns, but about having enough risk.

Something was missing here. The fund was generating extraordinary returns, without commensurate risks, as is evident from Prof. Scholes’ statement above.

Read more about the lessons from the LTCM episode in “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

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The story of every market cycle

By the time the market cycle reaches the extreme, the story becomes quite common. Whatever the origin of the boom or bust, the investor behaviour, more or less, is consistent.

First you lose your head, which results in the loss of lessons. Loss of money is the end result

Read more about the investor behaviour in “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

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Heroes humbled

Most market cycles end up with some of the erstwhile heroes being defeated. At the same time, there would be some who emerge unscathed

If you want to see what market cycles can do to someone’s reputation, check the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” to read about Julian Robertson, Prof. Irving Fisher, et al

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This is how CY2016 will pan out

Many experts attempt to predict future course of action in financial markets. However, seldom one gets most of this predictions right. It makes more sense to position yourself to benefit from various developments in the financial markets than trying to predict the financial markets.

To read more click here

Extrapolation, overconfidence and turning points

It is generally at the turning point of events that many experts as well as investors get carried away with the momentum and assume continuity

So often, experts extrapolate the (recent) past to predict. So long as the trend continues, they are proved right. This gives them overconfidence and they are celebrated as heroes.

Then, the inevitable happens. The events take a turn.

 

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Meteoric rise

Sensex went up from 1957 on 1 January 1992 to 4387 on 2 April 1992 – a rise of a whopping 124% in three months

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Aftermath of boom and bust

In the aftermath of the boom and bust, many lose out completely and the world moves on

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