They Risked What They Did Have and Did Need to What Didn’t Need and Didn’t Have

Warren Buffet, a renowned investor and business magnate, highlighted the fascinating story of the collapse of Long Term Capital Management (LTCM), a firm managed by a group of highly intelligent individuals with vast experience in the field.

Despite their exceptional intelligence and expertise, the firm’s excess leverage misfired in the opposite direction, leading to its downfall. Buffet raises the question of why smart people sometimes make foolish decisions when it comes to financial risk-taking.

He argues that risking something that is important to you for something unimportant is just plain foolish, no matter how favorable the odds may seem.

You should read about the story of Long Term Capital Management. The firm was run by a bunch of ethical super smart guys with very high IQ. The company went belly up because their excess leverage misfired in the opposite direction.” If you take John Meriwether, Eric Rosenfeld, Larry Hilibrand, Greg Hawkins, Victor Haghani and the Nobel prize winner Myron Scholes.

If you take the 16 of them, they probably have the highest average IQ of any 16 people working together in one business in the country, including Microsoft or whoever you want to name so incredible is the amount of intellect in that room. Now if you combine that with the fact that those 16 have had extensive experience in the field in which they operate.

I mean, this is not a bunch of guys who made their money selling men’s clothing and all of the sudden went to the security business or anything. They had, in aggregate, probably 350 or 400 years of experience doing exactly what they were doing. And then you throw in the third factor: that most of them had virtually all of their very substantial net worth in the business. They have their own money tied up, hundreds of hundred of millions of dollars of their own money tied up, a super high intellect, they were working in a field they knew, and they went broke. And that to me is absolutely fascinating. If I write a book, it’s going to be called “Why do smart people do dumb things?

To make the money they didn’t have and they didn’t need, they risked what they did have and did need that’s foolish, that’s just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense. I don’t care whether the odds are 100 to 1 that you succeed, or 1,000 to 1 that you succeed.

If you hand me a gun with a thousand chambers or a million chambers, and there is a bullet in one chamber and you said ‘put it to your temple and pull it’, I’m not going to pull it. You can name any sum you want. It doesn’t do anything for me on the upside, and I think the downsize is fairly clear.

I’m not interested in that kind of a game, and yet people do it financially without thinking about it very much. It’s like Henry Kauffman said the other day– the people going broke in these situations are just two types: the ones who know nothing, and the ones who know everything.
via https://www.youtube.com/watch?v=Oc4WMUB8ljQ