When Genius Fails
I have been reading the famous book When Genius Failed: The Rise and Fall of Long-Term Capital Management. This was written in 2000 by Roger Lowenstein, who was a journalist and writer for the Wall Street Journal, and a keen mind. The book and couple of independent conversations triggered this thought process and the post. A friend who is my co-worker for a fortune 500 company, an extremely smart individual and geoscientist, yesterday confided in me that he is nearly broke, and is seriously worried about his two kids, son and daughter, who are both in Universities. First of all, I am quite certain, 'being broke' is a feeling to him mostly and anxiety, and not reality at 100%. This is simply because that he is a salaryman, and get paid a lot. Yet, the perception is real, because his daughter is at a residential university at Madrid, and his son goes to Texas A&M, which is an excellent school, but together they are expensive. I also learned that he never had a college savings plan for his kids (in US it is called the 529 plan). Wow! He got divorced a couple of years back, and got re-married and a new born. So you can imagine, that his life is stressful, and suddenly he is feeling overwhelmed at a ripe age with a new born and a two college kids at the same time.
Generated by Leonardo
These whole preamble got me in thinking that we are conditioned to believe that brilliance is the ultimate insurance policy. This friend of mine is very smart and we regarded along his peers. When facing a complex problem—be it an engineering challenge, a scientific equation, or a financial investment—we instinctively trust the person with the highest IQ, the most degrees, or the deepest technical expertise. We assume a mind capable of seeing patterns others miss will surely succeed where the rest of us falter. Yet, when we step into the chaotic, psychological arena of business and investment, this assumption collapses. It is here that the greatest minds often commit the most spectacularly bone-headed mistakes, proving that a high intelligence quotient is no match for market volatility and human emotion.
Generated by Leonardo
The most stunning historical evidence of this paradox belongs to the man who literally defined the laws of the universe. I mentioned this story to multiple people and I find it fascinating. Sir Isaac Newton, the genius who gave us calculus and the theory of gravity, couldn't figure out when to sell a speculative stock. In 1720, Newton held shares in the infamous South Sea Company—a classic, wildly overvalued bubble. He initially sold his shares for a tidy profit, sensing the frenzy was getting out of hand. But watching his friends and peers continue to make fortunes, his scientific logic was overridden by FOMO (Fear of Missing Out). He reinvested a massive sum, only to see the bubble burst months later, reportedly losing the equivalent of millions of dollars in modern currency. His famous lament—“I can calculate the motion of heavenly bodies, but not the madness of people”—serves as the perfect epitaph for the brilliant investor who gets caught in a trap of their own making.
LTCM: The Perfect Modern Example
Long-Term Capital Management is the perfect case study to follow because in that case, it was not a single individual. Also, it was not merely an intelligent team, but a financial supergroup built on the pinnacle of pure quantitative logic:
Amazon link, if you like to buy the book
The Geniuses:
LTCM's partnership included two Nobel Laureates in Economics, Myron Scholes and Robert C. Merton (known for the Black-Scholes options pricing model), alongside John Meriwether, a legendary bond trader from Salomon Brothers, and a team of PhDs.
The Certainty:
They used complex mathematical models to execute "arbitrage" trades, betting on the idea that highly specific price differences between related bonds would converge over time. They believed their models had virtually deconstructed risk.
The Flaw:
Their models were based on historical data and assumed markets behaved according to a normal distribution. However, they failed to account for a "Black Swan" event (the 1998 Russian default) and the subsequent mass panic and liquidity flight. During the crisis, all their supposedly "uncorrelated" trades moved against them simultaneously.
The Scale of Failure:
Due to extreme leverage (at one point controlling over $100 billion with only a few billion in capital), the fund lost over $4 billion in less than four months and required an unprecedented $3.6 billion bailout orchestrated by the Federal Reserve to prevent a wider systemic collapse.
If you don't feel inclined to read the book, here is a great simple video that does a decent job.
The moral of this story is just like Newton's flawless celestial mechanics failed to predict the "madness of people," LTCM's flawless mathematics failed to account for a simple, ugly reality: The market can remain irrational longer than you can remain solvent (one of my favorite quote by John Maynard Keynes).
At Hive
Today at hive we have seen many small time "leveraged" actions by individuals or group of people. All of them have failed or will fail. There is no if or but; THEY WILL FAIL. One recent project that bothers me is Leostrategy. I am not going to tag them to give them any publicity, but their action worry me. They are trying to sell Tesla stock as a leveraged bet to god knows who (Nigerians? Venezuelans?)! Other than complete lunatic or poor people, who can't buy TSLA through a brokerage account, who will buy a leveraged bet from a couple of self proclaimed smart guys?
Also just because you are smart doesn't mean you will be a good investor. The best you can be is a swindler. Please stay away from any leverage scheme that promise you to make money. The only promise there is that the project lines up the pockets for the founders. This is not just true for that project but every other "get-rich-quick" crypto project.
I see a similar thing in IT a lot. We have some certified geniuses in our place who can do some amazing things with code however when they have been put in a position where they have to propose a strategy or a system that does things they can often come up with the most convoluted turkey that fails real life usage. I think that's why they are best kept in a box! 😃😃
Real life usage escapes many smart people.
17 clicks to do a simple action because to them it's logical 🤣🤣
Simplicity is for simpletons!
Just because you are smart in one thing doesn't mean you are in everything.
And even that one thing you are smart on, even on that thing you can make grave mistakes that may make you look completely stupid!
I think I probably mentioned this story here. I had a close friend in college. He works for Microsoft and was the the main developer for Cortana (which is retired now and replaced by copilot). He is an ace coder back in the day before there was any LLM.
When we are in university together at OU, he came running to my room one day, with his new laptop that he bought recently. He said to me that he need to return it. So I had why, it seems to be working. He said, the laptop is making noise (the fan! And there were no SSD back then!).
So the Ace coder who thinks in code, didn’t know or realized that laptop had a fan and that makes noise! :)
Knowledge can be surprisingly segmented!
Haha, a classic example. Definitely good as part of a team but not leading anything!
💯
Understanding that is the key to building exceptional teams IMO.
Agreed, when something sounds too good to be true, it probably is. I am just waiting for Hive to come down a little bit against Etherium and then will buy some Hive and power it up. Leostrategy sounds good, but I will just take an old-fashioned slow and steady bet...
That's a great plan and no Leo doesn't sound good. One shouldn't touch it a 10 ft long pole!
Leverage is a very dangerous thing. Last month, many people lost money trading even with minimal leverage.
I heard this story about Newton. And also about how markets are often irrational, just like people.
Yes, this story is famous. There is a similar one on Warren Buffet shorting US dollar for 3 years before taking nearly a billion dollars in losses.
Did you like the book quite a bit? It's come up on my Audible recommendations a couple of times but I haven't given it a shot.
Have you heard of Edward Thorp or read A Man for All Markets? For some reason your post made me think of him, quite a fascinating person.
I knew about Ed Thorpe, he invented the first "wearable computer" in the sixties. But no I haven't read that book, I can pick it up.
I did finish the Legion Bob. It was interesting but later got a bit repetitive. I enjoyed the beginning better and the world view. It's very apt towards what is happening in the world today. :)
I hope you like that one, it's one of the more interesting investing/biography books I've read in the last few years. If I remember correctly, there is a section where he talks about Bernie Madoff and when it was brought to them how he could tell the math didn't add up and refused to invest. If not the book, maybe I heard him say it on a podcast with Tim Ferriss. Either way, fascinating guy.
Thanks for the feedback on the Legion Bob book, glad you tried it :-)
Nice to see u mentioning the Swedish investor. I also like his content
When I was researching the book the youtube video came in, I didn't know about them/him in the past.
The Swedish investor is a good content creator. I think I am following him since 2017 or earlier
Ray Dalio kind of tells a similar story about his experiences with a failed prediction almost bankrupting him after believing he had it all figured out. His response was to craft a culture of radical transparency where all people were questioned and checked and where dissenting voices were spotlighted and considered on merit. Its not a perfect system, but it has been overall successful for up to this point.
On Hive, I think we can benefit by hearing out some dissenting voices and giving them honest consideration based on the merit of the ideas. I think we do a decent job of this on DHF proposals, but I also think there are some opportunities to hear out other suggestions.
Mostly stochastic prediction method can't predict a single outcome, and definitely can't if the sample is outside the modeled distribution. This is just statistics.
Yes, and the more variables there are, the more difficult it is to predict. My interests are more along the lines of business operations strategies rather than market speculation.
Gracias amigo me incentivaste a leer el libro y tener un poco más de conocimiento, que sigas escribiendo buenos artículos, en cuanto al amigo que tiene como 4 hijos, que venga a Venezuela para que vea lo que es sobrevivir.