"Wall Street is a place where whatever can be sold will be sold. You are the consumer of their dreck. What they can sell to you, they will sell to you."
- quoted by Jeffrey Goldberg, "Why I Fired My Broker," The Atlantic, May 2009
Oops, He Did It Again!
As predicted by IFA’s April Fool’s Day, 2008 issue, John Meriwether’s latest hedge fund, JWM Partners has imploded.
Back in 1998, Meriwether was at the helm of the seemingly wildly successful Long Term Capital Management fund which blew-up virtually overnight as a bad currency bet and 50 times leverage caused LTCM investors to lose a whopping $4 billion, setting in motion a global financial crisis.
To hear Todd Kenyon of Seeking Alpha tell it, hindsight provides a crystal clear picture as to what made LTCM go so wrong. “With merely $5B in capital, Long Term had borrowed about $125B and had off-balance-sheet positions with notional values of over a trillion dollars.”
LTCM investors may have been caught unaware, but, what would possess an investor to give Meriwether more money after such an aggressive and massive disaster?
What Meriwether lacks in investment savvy, he seems to make up for in salesmanship, convincing investors to give him billions and assuring them that he had taken the cure against excessive leverage. Meriwether’s new fund employed 15 times leverage, borrowing $15 for every $1 invested—still enough leverage to destroy the fund, which he did—again.
And why not try his luck again with willing participants? Meriwether knew the good that would come of it for him—if not for his investors.
According to Kenyon, Meriwether garnered a whopping 2% of assets under management plus 20% of gains, resulting in an incredible $46 million to Meriwether in 2008—despite the fact that the fund is down 44%!
Despite the massive leverage, the whopping fees and the lack of transparency, Kenyon reports that Meriwether’s fund spent years underperforming an index fund before it finally imploded, exposing investors to devastating downside without ever enjoying the upside.
The free markets pack a powerful lesson about a fool and his money soon parting.
Meriwether was able to sell his own brand of dreck because buyers were willing to accept the risks of 15 times leverage—despite the fact that Meriweither was a proven and colossal failure. Perhaps, they were too naïve to understand the enormity of the downside, or they were blinded by the mirage of easy money they saw in Meriwether’s crystal ball.
The reality: Meriwether was wrong—again. Investors lost big—again.
The deepest cut: Meriwether made a fortune while he wiped out investors.
The bitterest pill: Time online alludes to the idea that Meriwether may be getting ready to launch a new hedge fund.
Your Call to Action: Forward this email to everyone you know to prevent them from being a consumer of Wall Street’s dreck.
IFA video exclusive! Nobel Prize Winner Harry Markowitz explains the implosion of LTCM and the hazards of leverage. (Click here to watch)
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Presenting “Murphy” IFA’s 10-foot tall probability machine, used to demonstrate the "random walk" of stock market prices.
Murphy in motion clearly illustrates the random nature of all things, including the stock market.