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nerve) survives the bear or a significant correction is a different matter. A balanced approach employing fundamental and technical analysis works best. Investors do not need to get too complex in their decision-making. The methods used for many decades still work the best. |
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Neal: Can you be more specific regarding why a simplified approach is better? |
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Tom: Much has been made about the failure of Long Term Capital Management (LTCM) and their particular brand of "rocket science," and rightly so. One of their lenders, UBS Bank, had to write off $700 million from LTCM losses and fired a bunch of senior executives responsible. That is just the tip of the iceberg, of course. The LTCM fiasco is very reminiscent of the Olympia and York debacle of the early 1990s. In both cases, it was deemed by bankers to be poor manners to ask the borrowing party to produce financial statements before lending (investing) huge amounts in their enterprises! Isn't it amazing how the banks make the same mistakes repeatedly? I think that this has something to do with the worship of academics in our culture. Studies with actual money in real-time (as opposed to simple back-testing) have shown that there is an inverse correlation between making money consistently in the market and the degree of complication in your investment approach. Many bankers, who have a passion for numbers, fall in love with the idea that if they just crunch the numbers enough, they can get an edge. This allows for increasingly complicated houses of cards like LTCM. They are based on a weak foundation. And by ignoring the technical evidence of increasing risk within the cycle, you can get these situations that can have a huge impact on the rest of the marketin fact, the rest of the world's markets. |
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Neal: You seem to be down on hedge funds. |
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Tom: Not at all. "Hedge Fund" in itself is a very broad term. The hedge fund approach that I like best, and the one I currently use |
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