According to China's information, the United States Long-term Capital Management Company (LTCM):
1. The four kings:
Founded in 1994, the US Long-term Capital Management Company is mainly active in the international bond and foreign exchange markets. It uses huge investments from private clients and a large number of loans from financial institutions to specialize in financial market speculation. Together with Quantum Fund, Tiger Fund, and Omega Fund, it is known as the four major international "hedge funds".
2. Dream combination:
The head of LTCM is Meriwether, known as the father of Wall Street debt arbitrage who can "turn stones into gold". He gathered a group of elites from Wall Street securities trading to join: Robert Merton and Myron Scholes, winners of the 1997 Nobel Prize in Economics, who won laurels for the option pricing formula; former Deputy Minister of Finance and Federal Reserve Vice Chairman Morris (David Mullis); former Solomon Brothers bond trading director Rosenfeld (Rosenfeld). This elite team gathers professional stars, public relations stars, and academic giants, which can be called a "dream combination."
3. Proud performance
During 1994-1997, LTCM achieved brilliant performance. At the beginning of its establishment, its net asset value was US$1.25 billion. By the end of 1997, it had risen to US$4.8 billion, a net increase of 2.84 times. The annual rates of return on investment were 28.5% in 1994, 42.8% in 1995, 40.8% in 1996, and 17% in 1997.
4. Tips for getting rich:
Long-term capital management company based on the "natural nature of unreasonable price differences between securities in different markets", and formulated an investment strategy of "through computer precise calculations, discover abnormal market price differences, enlarge capital leverage, and make profits in the market". Scholes and Merton organically combined historical transaction data on financial markets, existing market theories, academic research reports, and market information to form a complete set of computer mathematical automatic investment models. They use computers to process a large amount of historical data, obtain the normal historical price difference between two different financial instruments through continuous and precise calculations, and then analyze the latest price difference between them based on market information. If there is a deviation between the two and the deviation is being amplified, the computer immediately builds up a huge portfolio of bonds and derivatives, and aggressively arbitrages investment into the market; after a period of market adjustment, the amplified deviation will automatically return to the normal trajectory, and the computer commands Close the position and leave the market to obtain the difference of the deviation.
5. The sewer capsizes
LTCM never expected that the Russian financial turmoil triggered global financial turmoil. As a result, the price of German bonds it sold short rose, and the prices of Italian bonds and other securities it sold fell. The positive correlation it expected turned into a negative correlation. , The result is a loss at both ends. Its computerized automatic investment system erroneously continuously enlarges the operation scale of financial derivatives in the face of such negligible small probability events. LTCM used the US$2.2 billion raised by investors as capital collateral to buy US$325 billion worth of securities with a leverage ratio of up to 60 times. This resulted in huge losses for the company. From the Russian financial turmoil in May to the complete collapse in September, the net asset value fell by 90% in just 150 days, and it suffered a huge loss of 4.3 billion US dollars, leaving only 500 million US dollars. It has reached the brink of bankruptcy. On September 23, the Federal Reserve came forward to organize and arrange that 15 international financial institutions, led by Merrill Lynch and Morgan, invested US$3.725 billion to purchase 90% of LTCM's equity, and jointly took over the company, thus avoiding the doom of its bankruptcy.
There is no magic weapon in the speculative market. Any analysis method and operating system have flaws and misunderstandings. The story of the American Long-Term Capital Management Corporation is the latest and most convincing evidence.
(1) There can be no sacredness in the speculative market, and anyone will make mistakes. The long-term capital management company has the world's top bond operators Meriwether and Rosenfeld, the world's top scientific research talents Merton and Schultz, and the world's top public relations and financing talents Morris. But every character in this "dream combination" is responsible for LTCM's setback. Therefore, we investors should not be superstitious of anyone, we must have the ability to think independently.
(2) There is no magic weapon to win in the speculative market, and any analysis method and operating system have defects and misunderstandings. LTCM once thought that it had mastered the secrets of getting rich, succeeded again and again in the international financial market, and was full of confidence. However, there was a small probability event that they ignored, which caused a huge loss and was almost bankrupt. Therefore, when our stockholders use any method or tool to operate in the securities market, we must realize that they sometimes make mistakes and make you miss some opportunities. If their errors are only a small probability event, the correct is a high probability event (for example, greater than 60%), and it is more suitable for your personality, you stick to them, but also pay attention to the following tips.
(3) To survive and develop in the speculative market, risk control is an eternal theme. Precisely because anyone can make mistakes in any method in the stock market, controlling risk is an iron law that our investors should keep in mind for life. It doesn’t matter if the method or tool you rely on only makes you miss some money-making opportunities when something goes wrong. If they make mistakes, they may hurt your muscles, lose your entire army, or even get into debt. Such risks must be strictly controlled. In order to avoid these tragic endings from happening to our stockholders, first of all, we should not overdraft stocks, secondly, we should not borrow money to stock stocks, and again we should pay attention to stop losses when we stock stocks at high positions, and finally we should not blindly and frequently speculate.