Money Management By Failure
You would think money management firms would be evaluated by their ability to help people build wealth. Apparently that's not always the case. At least not when it comes to John Meriwether.
Mr. Meriwether ran a hedge fund in the '90's called Long-term Capital. Do you remember LTC? It collapsed in 1998. But it wasn't a typical hedge fund "implosion." LTC's collapse almost brought down the entire world's financial system. The Federal Reserve, U.S. government and all the heads of the major Wall Street firms had to gather together on an emergency basis to save the world from financial collapse.
I don't have time to go into the story here, but the spectacular collapse of LTC was documented in fascinating detail in a book, "When Genius Failed" by Roger Lowenstein. I read the book years ago. If you're interested, it's a good read and will be worth your time.
You would imagine that Mr. Meriwether would retire (he was a rich Wall Street banker from Solomon Brothers when he started his hedge fund.) You would imagine it would be impossible for him to raise any more money from investors. After all, his money management skills led to an unmitigated disaster. But you would be wrong.
In fact, Mr. Meriwether raised millions. He started another hedge fund. That fund used similar techniques to the ones that got LTC in trouble. Last year he lost 44% of his investors money and closed that fund too. This time, thank goodness, it didn't threaten to take down the rest of the financial system. That task was left up to the collapse of Lehman Brothers - but that's another story.
So, again, you would imagine that Meriwether would slink off somewhere and enjoy whatever millions he has left and play golf - or do whatever failed, rich hedge fund managers do. But, of course, you'd be wrong again.
He's starting up yet a third fund. And, naturally, it will probably employ the same strategies that the first two failed funds followed. Is this insane or what? Not really.
The face is, most people will give their money to people who have certain connections, certain pedigree, or who are considered "smart." (Notice the title of the book on LTC: "When Genius Failed.") Of course, if you're someone with common sense, who can make up his or her own mind and not follow the crowd, or who has the ability to judge things on an objective basis, you would never fall into the trap of entrusting your money to someone just because they had the right pedigree, a certain type of resume, or who everyone adores as being "smart," right? You certainly wouldn't if that person had already lost a bundle of other people's money not once, but twice. At least I hope you wouldn't.
But then again, you'd be in the minority. Because that's precisely what many people and institutions do. And, more often than you would imagine, they reward money management by failure as a result. Meriwether's just a spectacular example of this strange phenomenon.
Mr. Meriwether ran a hedge fund in the '90's called Long-term Capital. Do you remember LTC? It collapsed in 1998. But it wasn't a typical hedge fund "implosion." LTC's collapse almost brought down the entire world's financial system. The Federal Reserve, U.S. government and all the heads of the major Wall Street firms had to gather together on an emergency basis to save the world from financial collapse.
I don't have time to go into the story here, but the spectacular collapse of LTC was documented in fascinating detail in a book, "When Genius Failed" by Roger Lowenstein. I read the book years ago. If you're interested, it's a good read and will be worth your time.
You would imagine that Mr. Meriwether would retire (he was a rich Wall Street banker from Solomon Brothers when he started his hedge fund.) You would imagine it would be impossible for him to raise any more money from investors. After all, his money management skills led to an unmitigated disaster. But you would be wrong.
In fact, Mr. Meriwether raised millions. He started another hedge fund. That fund used similar techniques to the ones that got LTC in trouble. Last year he lost 44% of his investors money and closed that fund too. This time, thank goodness, it didn't threaten to take down the rest of the financial system. That task was left up to the collapse of Lehman Brothers - but that's another story.
So, again, you would imagine that Meriwether would slink off somewhere and enjoy whatever millions he has left and play golf - or do whatever failed, rich hedge fund managers do. But, of course, you'd be wrong again.
He's starting up yet a third fund. And, naturally, it will probably employ the same strategies that the first two failed funds followed. Is this insane or what? Not really.
The face is, most people will give their money to people who have certain connections, certain pedigree, or who are considered "smart." (Notice the title of the book on LTC: "When Genius Failed.") Of course, if you're someone with common sense, who can make up his or her own mind and not follow the crowd, or who has the ability to judge things on an objective basis, you would never fall into the trap of entrusting your money to someone just because they had the right pedigree, a certain type of resume, or who everyone adores as being "smart," right? You certainly wouldn't if that person had already lost a bundle of other people's money not once, but twice. At least I hope you wouldn't.
But then again, you'd be in the minority. Because that's precisely what many people and institutions do. And, more often than you would imagine, they reward money management by failure as a result. Meriwether's just a spectacular example of this strange phenomenon.
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