|
PureBytes Links
Trading Reference Links
|
-----Original Message-----
From: TheGonch <Daniel.Goncharoff@xxxxxxxxxxxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Saturday, October 03, 1998 6:52 AM
Subject: Re: Long Term Capital Management
>I am no expert, but a couple of thoughts come to mind quickly:
>
>If the stock market drops, who wins??
In order to buy stock, someone must be willing to sell it. The winner is
the person who sold at/near the top. He is an even bigger winner if he sold
short.
>Similarly, if Italian interest rates go up relative to US interest
>rates, who wins?
Likewise, in the deratives markets there is always someone who takes the
opposite side of each transaction. The money that LTCM lost did not
"evaporate" it was transfered to others.
>It seems to me that both a falling stock market and rising interest
>rates both eliminate wealth. Together they can eliminate a lot of wealth.
No, not true. It is however, a very effective re-distributor of wealth. I
recall when U.S. interest rates where in double digits and rising. A CD
paid an excellent return. A few years later the same people where
complaining that they could not live on 3-4%. They did not understand that
market conditions had changed.
The goal is to be on the right side of the trade, not necessarily from the
very beginning to the very end. More importantly, it is vital to be able to
admit you are wrong and get out with small losses.
LTCM was short market volatility (betting that high volatility would
decline, giving then a large profit). This is a position with limited up
side potential, hence the need for them to take very large positions and
requiring high leverage to achieve these positions. While this is a
strategy that often times works, it is by no means a shure thing, and when
wrong the losses can be unlimited. In addition they where trading in
illiquid markets, making it very difficult to get out of them.
In addition, I had heard that as they realized they where in trouble, they
tried to sell there portfolio. In order to do this they had to reveal their
positions, giving speculators the opportunity to take them down.
Good luck and good
trading,
Ray Raffurty
|