Comments on: The Lessons of Long Term Capital Management (LTCM) and the Volatility of August 2007 http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/ The personal blog of Adam Nash Sat, 11 Feb 2012 23:08:18 +0000 hourly 1 http://wordpress.com/ By: links for 2008-11-12 at DeStructUred Blog http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-25656 Thu, 13 Nov 2008 02:03:15 +0000 http://psychohistory.wordpress.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-25656 [...] The Lessons of Long Term Capital Management (LTCM) and the Volatility of August 2007 « Psychohistor… (tags: finance crisis) [...]

]]> By: Why the Price of Gold is Sinking Fast « Psychohistory http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-25544 Fri, 24 Oct 2008 04:15:11 +0000 http://psychohistory.wordpress.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-25544 [...] Comments Alexander on The Lessons of Long Term Capit…Todd on The Secret to Reformatting a W…Blake on Carter:Bush, Reagan:Obama,…Adam Nash [...]

]]> By: Alexander http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-25543 Fri, 24 Oct 2008 00:41:08 +0000 http://psychohistory.wordpress.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-25543 Hmmm, that was written in August 2007. Welcome to Sept/Oct 2008. Hope you took your own advice.

]]> By: Adam Nash http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12946 Wed, 15 Aug 2007 22:56:25 +0000 http://psychohistory.wordpress.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12946 If everyone diversifies the same way, then yes, I think that everyone could get screwed. At least, that was the point I was trying to make above.

Diversification is built on historical models that assume a certain correlation of risk & return between assets. But dramatic changes in ownership patterns will change those relationships.

Adam

]]> By: Jason http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12936 Wed, 15 Aug 2007 17:14:52 +0000 http://psychohistory.wordpress.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12936 Not arguing the value of diversification, but it’s worth noting Buffett’s statement. Basically, diversification is a mechanism to reduce risk, and Buffett’s belief is that if you can reduce risk through knowledgeable investment, diversification is much less important.

By the way, you said: “ANY investment strategy will turn on you if everyone piles into the same thing.”

Does that include diversification? If everyone else diversifies too, am I screwed? :)

]]> By: Adam Nash http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12878 Tue, 14 Aug 2007 22:25:05 +0000 http://psychohistory.wordpress.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12878 I think another factor in last week’s eBay rise was speculation around the value of the MercadoLibre IPO. Strangely coincidental that the stock topped off right before the IPO priced.

Jason, I believe Warren Buffett is content to invest purely in areas where he believes he has expertise (although, he has had mishaps with macro-economic speculation himself). The truth is, diversification is math that is very hard to argue with.

I’m reading a book right now that ironically is all about this topic and more… it’s called “Demon of our own Design”. It’s very good, and it basically emphasizes that ANY investment strategy will turn on you if everyone piles into the same thing.

Adam
- Adam

]]> By: Rebecca Nathenson http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12875 Tue, 14 Aug 2007 20:48:37 +0000 http://psychohistory.wordpress.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12875 I did know *what* they did, and what it meant. But it still didn’t seem to make sense as a driver for that degree of movement, especially when you take the market slide over the same period of time into account.

]]> By: Jason http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12863 Tue, 14 Aug 2007 17:51:31 +0000 http://psychohistory.wordpress.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12863 Rebecca,

eBay upped their credit line, effectively giving them the ability to leverage several $B more than they previously could. This indicates that they are likely looking to spend a bunch of money for something other than an acquisition…leading people to believe they will either be initiating a major stock buy-back or initiating a one-time or recurring dividend.

Either of those activities (stock buy-back or dividend) is good for the shareholders and will drive the price up in the short-term, but for long-term value, I certainly hope that they are planning a buy-back or recurring dividend, as a one-time dividend doesn’t promote long-term value and can prove a slippery slope with respect to investor confidence (MSFT made this mistake back in 2002, before deciding to pay recurring dividends).

]]> By: Rebecca Nathenson http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12857 Tue, 14 Aug 2007 15:49:02 +0000 http://psychohistory.wordpress.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12857 The day after I read this post from you, Paul Krugman said largely the same thing (well, it was the day after in the Merc–he may well have said the same thing on the same day).

Very interesting post–I’m keeping my fingers crossed that it doesn’t all collapse, because that seems to be as reliable a technique as anything else.

eBay continues to be oddly divergent from the major indices. It’s settling down a little today, but the buzz around the office last week was, “What’d we do? Does anyone know what we did? Credit facility? What?!?”

]]> By: Jason http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12807 Mon, 13 Aug 2007 22:35:47 +0000 http://psychohistory.wordpress.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12807 First of all, great post, Adam…

Really puts into perspective that as money continues to funnel into smaller and smaller percentages of the population (yes, the rich keep getting richer), overall correlation of asset markets will continue to converge, with the volatility hurting the small investor the worst (yes, the poor keep getting poorer).

Reminds me of a Warren Buffet quote:

“Some people claim that there’s a woman to blame. Now i think, Hell, it could be my fault.”

Whoops, that was Jimmy Buffet. :)

Here’s the Warren Buffet quote:

“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”

]]> By: Eric Albert http://blog.adamnash.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12762 Mon, 13 Aug 2007 05:53:42 +0000 http://psychohistory.wordpress.com/2007/08/12/the-lessons-of-long-term-capital-management-ltcm-and-the-volatility-of-august-2007/#comment-12762 That’s an interesting post. Of course, the corollary to the “co-investment” issue you describe is that if a particular combination of asset classes attracts enough investment to become correlated, by definition folks looking for market-exceeding gains will have to start to adopt a strategy that is differently correlated yet again. As you mention, something like that may take some time to work itself out…and it’s conceivable that as coverage of different asset classes and visibility into asset allocations from large funds both grow, we may see substantial market volatility as the herd follows various leaders. That’s a bit scary. But everyone who’s very serious about being a long-term investor has to be able to cope with market volatility, even if it’s rather difficult at times.

Another way of looking at this is that the scenario you describe is one in which the advanced diversification system essentially falls apart as a market-exceeding vehicle only if too much money is thrown at it. Perhaps that’s a good thing — it means that over the long run, as even more money is thrown at it (assuming that despite the recent troubles, the amount of money invested in the markets continues to increase) and as investing in those new asset classes becomes easier for average folks, we’ll simply end up picking up new asset classes which will have similar volatility to the existing markets. In other words, we’ll have more options as individual investors, and the predictability of those investments will improve as the markets have more experience with them.

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