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To: Wyätt Gwyön who wrote (123741)	9/3/2002 5:55:43 AM
From: Maurice Winn	Respond to of 152472

Mucho, re the Long Term Capital Management debacle, I haven't bothered to wade through all the intricacies of what they were doing but there are a couple of things which strike me. 1..... The whole concept of our brains being useless in the face of the market monster of randomness conflicts with all sense of reality. Reality is that brains are predictors of the future. That's what they are for. They take the accumulated wisdom of eons of evolutionary mayhem, distilled into a couple of DNA chains and then exposed for a couple of decades to the exigencies of current life. Then, with that structure, they set off to defeat the challenges of current existence. Now, in our DNA there haven't been eons of Nasdaq challenges so we are definitely quite limited in our evolutionary adaptation to stock markets. But limitation is far different from ignorant randomness. We are operating on somewhere between 50:50 and perhaps 55:45 odds [maybe 65:35 for champions]. The vast pool of ignorance we all have about the infinite array of variables which affect and afflict our target companies means we are always stuck with a large degree of pure luck. So anyone can be made to look a fool, 10 times in a row and any monkey can be made to look a genius, 100 times in a row. We can't tell which was luck and which was smart, even with some apparently clever commentary about the stocks, such as given by George Gilder and me [on my narrow little spectrum of interest - Globalstar and QUALCOMM]. Long Term Capital Management seems to have tried to do away with the need to understand value by trading in risk management rather than the underlying asset values. Which led them to 2... 2..... They need to have liquidity and counterparty stability to stack a trillion dollars of deals in a huge pile. What happens if counterparties fail to fulfill contracts and half their risk management falls over? They can't force compliance. Not in any meaningful time period anyway. As Uncle Al has explained, our whole capitalist system is built as an edifice of trust. Trust can't be forced. If counterparties fail to perform, we are in big trouble. Sure, individual contracts can be enforced and that's what maintains good contractual compliance standards. But if masses collapse, there isn't enough time to get enforcement and liquidity. It's game over in a day. 3..... They failed to allow for Globalstar's Zenit rocket hitting the ground in Siberia. That little butterfly failing to take off from Kazakhstan caused a Wall Street hurricane. I think that was the triggering event which precipitated their collapse. They had a good chunk of Globalstar investment. I wonder if the Ben Schwartz in that article is related to Bernie Schwartz of Globalstar fame. Nephew or something? Brains beats randomness. Not always, but given enough trials they do. Randomness is nothingness. Brains are all. The reason great investors can't beat the markets is because the markets are priced by the premium championship brains with big stacks of money, so the smartest people do the pricing of the markets. The rest fit into randomness and make up the liquidity, some of whom win and some of whom lose on trading, but with a diversified portfolio, they win on average 8% a year. The obviously mispriced markets shows just how incapable of pricing things correctly even the smartest people are. There are simply too many variables hiding in the future which are unknowable [to we genius investors who price the markets as near to perfection as we are able]. Which is not an argument to give up. It's an argument to more perfectly price the markets and make a profit by smoothing the peaks and troughs. Which is not all that easy to do, but a lot of people are working on it. Those who turn out to be not very good at pricing shares will lose their shirts to those who are better and to the brokers who manage the operations. The fun of it all is that none of us knows how much is luck and how much is smarts. If we are not good at pricing shares, then we will be funding those who are and providing them the profits at the peaks and troughs. We, the ignorant, can still make money by holding for a long time through the peaks and troughs and earning our miserable 7%. The smarties get their 7% AND the peak and trough smoothing profits as well. That's my theory. Notice that Uncle Al isn't featuring in the theory. Mqurice