This week we read the following in one of the big newspapers:
“Professor Robert Shiller, the Nobel laureate, says valuations adjusted for high inflation suggest stock returns for the next decade are likely to be modest.”
He said this because we have seen an incredible record streak of rising share prices in the USA mainly caused by mania around artificial intelligence and the defence industries.
Every big and small media company around the world has been writing about Nvidia rocket-like share price rise (see above graph) because they are the biggest developer of specialised AI chips…
The share prices of the other huge tech companies, Microsoft, Google and Amazon, that have all been investing heavily in AI projects have also seen their share prices rise.
However it is worth remembering the events on some 30 years ago when a couple of other Nobel winning professors started to play in the capital markets.
The similar stories like the one below have been seen so many times – professors come and go and like the clock that has stopped they tell the right time once but more often than not they are hopelessly lost.
Rule number one in investing is that nobody has a clue, not even the professors, what will happen in 6 months time let alone in years time…
We just need a diversified investment portfolio that suits our investment timeline. The banks and share traders always make huge profits by getting investors to buy and sell more than they need to do.
Here is the story…
Long-Term Capital Management (LTCM) was a highly leveraged hedge fund. In 1998, it received a $3.6 billion bailout from a group of 14 banks, in a deal created by the Federal Reserve Bank of New York to stop another financial crisis.
LTCM was founded in 1994 by Mr. Meriwether, a former boss of bond trading at Salomon Brothers, a former big American investment bank.
Members of LTCM’s board of directors included two famous finance and economics professors, Myron Scholes and Robert C. Merton, who shared the Nobel Prize in Economics in 1997 for having developed the Black–Scholes model for option pricing!
LTCM was initially successful, with annualized returns of around 21% in year one, 43% in year two, and 41% in year three.
However, in 1998 it lost $4.6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and 1998 Russian financial crisis.
The whole fund collapsed afterwards leading to the bailout and finally liquidation in 2000.
None of these above-mentioned guys mentioned anything about the above share price rises a few years ago…
Graphs from Yahoo Finance
