-

△EBIT/EBIT

EBIT

= -

EBIT 1 (interest)

Changes in earnings before interest and tax cause changes in earnings per share.

Simply put, the more debt, the greater the financial leverage and the greater the risk, which will affect the shareholders' income, and the money earned will not be enough to pay the interest on the debt, resulting in losses. LTCM failed in this way.

Re-understanding the Rise and Fall of American Long-term Capital Management Corporation (LTCM)

At the end of the year and the beginning of the year, I enjoyed a few days' holiday, leafing through books that had been idle for a long time on the shelf and telling the story of American Long-term Capital Management Company (LTCM). Presumably, many people have learned this story in detail. I read this book when I was in China last time. Now, after working in the North American financial industry for a period of time, rereading its story feels completely different from a few years ago.

There is no magic weapon in speculative market, and any analysis method and operating system have defects and misunderstandings. The story of American Long-term Capital Management Company is the most convincing evidence.

First of all, the mirage made by LTCM

1. Four Kings

Long-term Capital Management Company (LTCM), headquartered in Greenwich, not far from new york, is a hedge fund mainly engaged in arbitrage of debt instruments. Established in 1994, the fund is mainly active in the international bond and foreign exchange markets, specializing in financial market speculation of huge investments by private customers and large loans by financial institutions. Together with Quantum Fund, Tiger Fund and Omega Fund, it is called the four international "hedge funds".

2. Dream combination

The head of LTCM is Meriwehter, who is known as the father of Wall Street debt arbitrage. He called a group of elite Wall Street securities traders to join him:1robert merton and Miloon Scholes, the winners of the 1997 Nobel Prize in Economics, who won the championship because of the option pricing formula; David Muhlis; Former Deputy Minister of Finance and Vice Chairman of the Federal Reserve; Rosenfeld, former head of bond trading at salomon brothers Company. This elite team has gathered professional superstars, public relations stars and academic giants, which is really a dream combination.

3. Excellent performance

During the period of 1994- 1997, the performance of LTCM was excellent and impressive. At the beginning of its establishment, the net asset value was $654.38 +0.25 billion, and by the end of 654.38+0.997, it rose to $4.8 billion, a net increase of 2.84 times. The annual return on investment is: 65438+28.5% in 0994, 65438+42.8% in 0995, 65438+40.85% in 0996 and 65438+ 17% in 0997.

4. The secret of getting rich

Based on "the birth and death of unreasonable price difference of securities in different markets", Long-term Capital Management Company has formulated an investment strategy of "finding abnormal market price difference through computer accurate calculation, amplifying capital leverage and arbitrage in the market". Schultz and Merton organically combined the historical transaction data of financial markets, existing market theories, academic research reports and market information to form a relatively complete computer mathematics automatic investment model. They use computers to process a large number of historical data, get the normal historical price difference between two different financial instruments through continuous and accurate calculation, and then analyze the latest price difference between them combined with market information. If there is a deviation between the two, and the deviation is getting bigger and bigger, the computer will immediately establish a huge portfolio of bonds and derivatives and invest heavily in the market; After a period of market adjustment, the amplified deviation will automatically return to the normal level. At this time, the computer ordered to close the position and leave the field to obtain the difference of deviation.

5. the magic weapon of leisure

However, it can not be ignored that this automatic investment model of computer mathematics also has some fatal points: the assumptions and calculation results of the model are based on historical statistics, but historical statistics can never completely cover future phenomena; LTCM's investment strategy is based on the positive correlation between the price fluctuations of two securities in the portfolio. Although the positive correlation between German bonds and Italian bonds, its core assets, has been proved by a large number of historical data, some small probability events are often ignored in the statistical process of historical data. That is, the negative correlation between the above two bonds.

Capsize in the gutter

LTCM never imagined that the Russian financial turmoil triggered the global financial turmoil, and as a result, the price of German bonds it sold short rose, while the price of Italian bonds and other securities it sold long fell, and its expected political relevance became negative, resulting in losses at both ends. Its computer automatic investment system mistakenly enlarged the operation scale of financial derivatives in the face of this originally neglected small probability time. LTCM used $2.2 billion raised by investors as capital collateral to buy bonds worth $325 billion, with a leverage ratio as high as 60 times. This has caused great losses to the company. From the financial turmoil in Russia in May to the total collapse in September, its net asset value fell by 90% in just 150 days, with a huge loss of $4.3 billion, leaving only $500 million, which has come to the brink of bankruptcy. On September 23rd, the Federal Reserve made an arrangement, and 15 international financial institutions headed by Merrill Lynch and Morgan invested $3.725 billion to buy 90% equity of LTCM, and * * * took over the company, thus avoiding its bankruptcy.

Second, the enlightenment of the rise and fall of LTCM

1. The speculative market cannot be sacred, and everyone makes mistakes. Long-term capital management company has world-class bond operation experts, world-class scientific research talents and world-class public relations financing talents. However, every member of this dream team is responsible for the collapse of LTCM. Therefore, we investors should not be superstitious about anyone, but have the ability to think independently.

2. Speculative market has no magic weapon to win, and any analysis system and method has defects and errors. LTCM once thought that they had mastered the magic weapon of getting rich, and they succeeded again and again in the international financial market, and their confidence increased greatly, but there were small probability events, which caused huge losses. Therefore, when we use any tools and methods to operate in the securities market, we must be aware that they will also make mistakes and make you lose some opportunities.

3. To survive and develop in the speculative market, controlling risks is an eternal theme. It is precisely because anyone in the securities market can make mistakes in any way, so controlling risks is an iron law that we should remember all our lives. It doesn't matter if the methods and tools you rely on only make you lose some opportunities to make money when you make mistakes. If they make a mistake, they may make you hurt your bones, be wiped out and even be heavily in debt. Such risks should be strictly controlled. Therefore, don't overdraw stocks, let alone borrow money to stocks, and pay attention to stop losses in time when the stocks are high.

Futures trading is risky, and futures trading can only use venture capital. Not all investors are suitable for futures and futures options trading. You should consider your financial situation before you decide to trade. Past performance and assumed results are not enough as a reference for future performance.