Wednesday, January 26, 2011
I've been reading three interesting books on the demise of the Wall Street firms of Bear Stearns and Lehman Brothers.
I'll review the books more specifically in separate posts, but I'm motivated to point out that the biggest folly of these firms was to over-complicate investing and trading.
For example, one of the final straws for Bear was having to bail out its own sub-prime hedge funds. These hedge funds blew out because they loaded up (with leverage) on complex, illiquid products derived from mortgages. They used the products as collateral to borrow money from banks so they could keep buying.
Even with this use of leverage and sophisticated products, they were making 9 and 10% returns at the time I was making 12, 15, and 22% returns using my Stock Trading Riches system.
I was doing better than them, and I was using plain old liquid stocks and no leverage. They are using crazy securities invented by "rocket scientists"and using 40 to 1 leverage!
It goes to show that you should never underestimate simplicity.