Capital Growth Topics # 293: The Next Victim
From what we can tell from the media, a collective noun used to include TV, radio, newspapers, the Internet and other sources, Martin Armstrong, the founder and principal force behind Princeton Economics, has become the latest in a long series of high-profile financial figures to fall upon hard times. A series of spectacular failures in which Wall Street's best and brightest have committed Hari Kari with leverage instead of a sword.
Mr. Askin of Granite Capital learned that the sum of the parts need not equal the whole and then saw his brokers tighten the leash. Victor Neiderhoffer sold puts expecting a normal distribution. Instead he experienced an extreme and by the time the margin clerks had finished with him there was nothing left. Long Term Capital's Nobel Laureate scientists thought that US Treasuries were a useful hedge for marginal foreign debt until an extreme event overtook them and the Fed had to arrange a bailout. Now it appears that Martin Armstrong bet the house on the yen carry trade. For those of you not in the swirl, this is an old grind. One version--borrow short, lend long--figured in the S&L debacle. Another version--borrow cheap, lend dear--figures in Princeton's demise, or so we gather. (Low rates in Japan, higher rates elsewhere; borrow in Japan, lend elsewhere. Normally the cost of the currency hedge is the difference between the interest rates, but Mr. Armstrong was bearish on the yen and may not of hedged which could explain the debacle nicely.)
Collectively these and the many other disasters we have seen over the years have several things in common: greed, ego, hubris and leverage--all in more than healthy quantities. Individually any of these factors can be a killer; together they bring the great to their knees. Greed in excess blinds one to risk and thus opens the trapdoor to the abyss. Ego narrows the possibilities. Hubris suggests one can succeed where all others have failed. Leverage ups the intensity. So there you are--very hungry, in love with your own story, blind to the lessons of others and ripping along faster than the speed of light. Add a little market volatility and you have the perfect recipe for disaster.
Yet vast returns are again promised and investors queue up. Often the best and the brightest hear the siren's song; Long Term Capital took some of Wall Street's smartest money with it.
What are the lessons to be learned?
1> Investing is hard work.
2> There are no short cuts.
3> Humility is a useful survival trait.
4> If others have fallen on their swords, you can too.
5> Leverage is a two-way street.
6> Returns are not normally distributed.
7> The unexpected will occur.
8> No one makes more than 20% per year consistently.
9> 20% per year compounded is a superior result.
10>10% per year compounded is a good result.
And lastly, being smart may not help, in fact it may hinder. Perhaps these are not the most salutary words to would-be Masters of the Universe. Yet if heeded, these words have the power to keep the Masters from the Augean Stables.
John Bollinger, CFA, CMT
17 September 1999
bollingerbands.com
Also... Please scroll down to view up to date charts...
The stock market continues under pressure. Here you can see the continuing deterioration of two advance-decline lines, measures of the internal strength of the market. The first is from the New York Stock Exchange while the second reflects over-the-counter trading. These series have a long-term downside bias, but this decline is well in excess of anything we might have expected. The third chart is an Arms Index based on our GroupPower industry group structure. We'd expect to see the red line well over one, a sign of capitulation, before the decline ends.
bollingerbands.com
Regards,
John Madarasz |
