The past year has been a difficult one for most investors. After a precipitous decline, stock markets rose spectacularly. Inasmuch as few were able to negotiate those zigzags, most are eager to find some moneymaking help. It was assumed that very bright individuals would fit the bill, but evidence belies that.
The long-term record of leading investors, those with top reputations, including a well-known icon, is nothing to brag about. Observers can see for themselves confirmation of that.
A few years ago Long-Term Capital Management was a hedge fund run by several who were renowned in the industry, namely three had PH. D.s in mathematics and related subjects and were regarded as financial geniuses. Nevertheless, because of major miscalculations, the fund collapsed. That potentially entailed so much damage to the financial system, that central banks throughout the world bailed out the fund, thus averting a debacle.
Additional examples abound of brilliant (?) individuals who failed. In the United States two of the nation’s most prestigious universities had huge endowment funds theoretically run by "the best that money can buy." First and foremost was Harvard University’s endowment fund of $36.9-billion. It lost £11 billion in the bear market. It placed an enormous bet on interest rates headed higher, a terrible mistake. As a result it had to sell $2.5-billion in bonds to pay for part of its errors, plus half a billion dollars to get out of some interest-rate contracts, and $425-million over a 30 to 40 year period. The latter was to offset $764-million in losses. Some investments were impossible to sell in the stock market, so the fund had to be a bystander and watch them flounder. The university’s General Operating Account, a pool of cash from which bills were paid, fell from $6.6-billion to $3.7-billion.
Another illustration of financial geniuses’ blunders came to light in a report from Yale University, of which this columnist is an alumnus.
The endowment fund’s record had been so remarkable that the fund manager wrote a book on successful investing; he was paid $1-million in a year-end bonus by Yale, it became evident that a major segment of its portfolio was concentrated on exotic "investments," such as a Chinese retail chain and Russian timberland.
Warnings from this columnist went unheeded about the dangers of placing funds in those types of vehicles.
Those bizarre holdings fell dramatically in price, so that the fund overall lost billions of dollars, 30 per cent in the latest recorded quarter. A recovery in those outlandish stakes seems remote.
There is a warning lesson in the above examples.
Unfortunately, they are not isolated examples but exist throughout the investment field nowadays.
Hence, one should not count on geniuses to provide the best investment guidance.
Common sense, not a high IQ should be the key here.