One of the smartest investment teams ever assembled went bankrupt during one of the greatest bull markets in history.
Let me set the scene.
It's 1994. John Meriwether, a legendary bond trader on Wall Street, just launched a hedge fund called Long-Term Capital Management.
His team included two Nobel Prize winners, the former Vice Chairman of the Federal Reserve, and a team of PhDs.
Institutions were begging to get in.
$10M minimum investment.
Multi-year lock-up.
Higher fees than standard.
And it didn't matter. The money poured in anyway.
And for a few years, it worked.
1994: up 20%.
1995: up 43%.
1996: up 41%.
Or so it seemed…
On each trade, LTCM made a tiny return — fractions of a percent. So to turn tiny into massive, they borrowed. By 1998, for every $1 of their own money, they controlled $25 of assets. Some estimates put it closer to $30 (that is crazy).
Then Russia defaulted on its debt in August 1998. Markets panicked. Investors everywhere ran for safety at the same time. Everything moved against them.
$553 million gone in a single day.
$4.6 billion gone in four months.
The Federal Reserve had to call an emergency meeting and strong-arm 14 Wall Street banks into contributing $3.6 billion just to keep the whole thing from taking down the financial system.
The smartest guys in the room. And they still blew up.
Now I wouldn't be telling you this unless there was a massive lesson in this story. And Warren Buffett summarized it better than I ever could:
“To make money they didn't have and didn't need, they risked what they did have and what they did need. That is just plain foolish. It doesn't matter what your IQ is. If you risk something that is important to you for something that is unimportant to you it just doesn't make sense. I don't care whether the odds are 100 to 1 or 1000 to 1 that you succeed.”
— Warren Buffett
Business owners are incredible risk takers. And that bleeds into the portfolio. Big crypto allocations. High conviction bets. Concentrated positions.
But when you actually ask them what they want, what a rich life looks like, many are already well within their means to live it. Others are well on their way.
Yet their portfolio looks like it's built for someone who needs to get somewhere fast.
People put so much of their wealth at risk without thinking much about it. And in most situations, that extra makes absolutely no difference. If it all goes well, you die with a little more. If it doesn't, you risked what you needed for something you didn't.
You only need to get rich once. The goal is to stay there.
Until next time,
Ben Stauffer, CFP®
btw — I give free personalized financial playbooks. You get a clear list of exactly what to do next. Here's the link to get started.
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