Warren Buffett quotes

[elmagd2000]

BBJit was refering to a great web page called financial-gurus. I picked these quotes from Warren Buffett's page.

• "Rule No.1: Never lose money. Rule No.2: Never forget rule No.1."

• "Someone's sitting in the shade today because someone planted a tree a long time ago."

• "Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway."

• "Risk comes from not knowing what you're doing."

• "If you don't know jewelry, know the jeweler"

• "It's only when the tide goes out that you learn who's been swimming naked."

• "Wide diversification is only required when investors do not understand what they are doing."

• " Our favourite holding period is forever."

• "Derivatives are financial weapons of mass destruction."

Hani

[psytrader]

"When you combine ignorance and leverage; you get some pretty interesting results.

[wozdan]

Originally Posted by psytrader

"When you combine ignorance and leverage; you get some pretty interesting results.

also damn quickly I would say

[jotace]

Negative: derivatives only destroy you if you don't apply them the same rules of money management.

[psytrader]

Originally Posted by wozdan

also damn quickly I would say

Indeed. I believe the context of that remark was made in reference to the downfall of Long Term Capital Management (LTCM) after losing 500 million a day for eight days straight in the bond market with leverage of 25:1

I actually studied the LTCM downfall in a psychology class in my batchelors study. The case was shown as an example of the effects of cognitive dissonance. This is a theorem used by psychologists to define what happens when our personal beliefs of truth do not allign with reality.

I find it interesting that the greatest investment dream team of all time lost their a** using only a fourth of the leverage advertised by most forex brokers today.

Hmmmm,....perhaps a moment of reflection.

Regards

PSY

[Croesus]

Originally Posted by psytrader

I actually studied the LTCM downfall in a psychology class in my batchelors study. The case was shown as an example of the effects of cognitive dissonance. This is a theorem used by psychologists to define what happens when our personal beliefs of truth do not allign with reality.

LTCM... derivatives and high leverage...

...the rise and tragic fall of Long-Term Capital Management (LTCM).LTCM was a hedge fund that brought the financial world to its knees when it lost $4 billion trading exotic derivatives.

In its heyday, LTCM was run almost entirely by PhD’s and other extremely high level academics-the best and brightest on Wall Street. Several of its members were Nobel economists- Myron Scholes and Robert Merton. These academics relied heavily upon statistical modeling to discover how markets behave. At first, these models performed beautifully and the fund was up over 30% each year for several years.

Many Wall Street banks became investors as they considered Long-Term to be making riskless profits! Of course this is foolhardy, but blind faith was bestowed upon LTCM because of the pedigree of its creators.

Roger Lowenstein explains how Long-Term became arrogant due to its success and eventually leveraged $4 billion into $100 billion in assets. This $100 billion became collateral for $1.2 trillion in derivatives exposure! With this kind of financial leverage even the most minute market move against you can wipe you out several times over. Talk about financial weapons of mass destruction! This risk did not deter Long-Term, though.

Finally in 1998, Russia defaulted on its bonds- many of which Long-Term owned. This default stirred up the world’s financial markets in a way that caused many additional losing trades for Long-Term.

By the spring of 1998, LTCM was losing several hundred million dollars per day. What did LTCM’s brilliant financial models say about all of this? The models recommended waiting out the storm.

By August 1998, LTCM had burned through almost all of its $4 billion in capital. At this point LTCM tried to exit its trades, but found it impossible, as traders all over the world were trying to exit as well.

With $1.2 trillion dollars at risk, the economy could have been devastated if LTCM’s losses continued to run its course. After much discussion, the Federal Reserve and Wall Street’s largest investment banks decided to rescue Long-Term. The banks ended up losing several hundred million dollars each.

What became of Long-Terms founders? Were they jailed or banned from the financial world? No. They went on to start another hedge fund!

[psytrader]

"Like virginity, a stable price level seems capable of maintenance, but not of restoration."

-How To Pick Stocks Like Warren Buffett by Timothy Vick

[wozdan]

Originally Posted by psytrader

...the context of that remark was made in reference to the downfall of Long Term Capital Management (LTCM)...

....personal beliefs of truth do not allign with reality....
PSY

Yes, but not only, also to the fall of a japanese hedge fund, which name was I think, pardon my japanese "eifuku" which I think means somethink like fidelity, but I ain't sure.

As for LTCM, well the potential success of their strategy was based more or less on the belief that extreme market developments can be acurately priced and therefore hedged agianst using probabilty and mathematical models. The real world proved theme wrong. They didn't forsee that long established corellations could break down during extreme events. Usefullness of VAR or MonteCarlo analysys failed because of this. Leverage was something that made the problem 25 bigger than it was...

For me (as an fx trader) leverage was never an issue or a topic for theoretical discussions. I have some money that I use to trade, which I call risk capital. On any trade I risk just a small percentage of that money. However I use 100:1 leverage because the higher the leverage, the less money I need to keep at my broker. The rest of the money is safe in my bank. If my broker gave me 500:1 leverage I would just withdraw some money from my trading account and trade on the highest leverage. The value of one pip and th SL compared to my risk capital is what matters.

wozdan