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Investment Strategies: Four unscientific rules to increase returns

Posted April 18, 2008

“There are four simple rules you can follow to protect yourself against catastrophic losses… Incidentally, these ‘unscientific’ methods can also make you a heck of a lot of money.” — Floyd Brown

by Floyd Brown

Baltimore – (TFN): In 1994, two Nobel Prize winners, along with other partners, founded Long-Term Capital Management (LTCM) L.P. in Greenwich, CT. The hedge fund was an immediate success, nearly tripling the money of its investors between its opening and late 1997.

The fund managers applied the scientific method to develop sophisticated arbitrage strategies that were “market-neutral.” Using science, LTCM was supposed to make money whether stock prices were rising or falling.

Then came August 1998, and the best mechanisms that the scientific team could develop began to unravel. Long-Term Capital’s portfolio saw its value fall 44%, giving it a 1998 year-to-date decline of 52%.

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This translated into a loss of almost $2 billion in a single month.

“August has been very painful for all of us,” LTCM Chief Executive John W. Meriwether, the legendary Salomon Brothers bond trader, wrote at the time in a letter to investors. His words were clearly an understatement.

Investment Strategies: Four simple rules

Fortunately, there are four simple rules you can follow to protect yourself against catastrophic losses - strategies that LTCM certainly should have been following. Incidentally, these “unscientific” methods can also make you a heck of a lot of money… Read on to learn four rules.

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