The first rule of investing for Warren Buffet is simple, “never lose money.” While Wall Street has seen numerous success stories among high-profile traders, these traders are not immune to making mistakes. These errors typically cost investors billions of dollars due to bad investments, too much leverage and trading in asset classes out of their expertise.
Here is a list of 10 high profile market mistakes made by some famous investors.
When John Rusnak made a mistake of believing that the yen will appreciate after the Japanese bubble burst, it resulted in a loss amounting to $691 million for Allied Irish, as shown on investopedia.com. The Baltimore-based currency trader was later sentenced to seven and a half years after he pleaded guilty to hiding his losses in October 2002.
Energy Future Holdings
At the peak of the financial crisis, Warren Buffett purchased bonds amounting to around $2 billion, as indicated on fortune.com. The bonds were used in a leverage buyout of Energy Future Holdings. However, Energy Future was crippled by high levels of debt and a decline in the price of natural gas, which ate up the profits of the company. The company later filed for bankruptcy. This wrong-way bet cost the ‘Oracle from Omaha’ $873 million.
Daiwa Bank Ltd
Japanese trader, Toshihide Iguchi, spent 12 years making unauthorized trading in the New York branch of Daiwa Bank Ltd. The New York Times showed that the unauthorized trades made by Iguchi resulted in trading losses reaching $1.1 billion for Daiwa Bank in 1995. He served four years in a US prison after he confessed to hiding the losses from regulators. He was also fined $2.57 million by a New York federal judge.
A series of derivatives trades by Singapore-based derivatives trader Nick Leeson in the Japanese stock market resulted to the collapse of the oldest merchant bank of Britain, Barings Bank. The losses incurred by Neeson in the bad trades reached $1.3 billion. These were hidden in an obscure Error Account 88888, according to BBC News. A spot audit in February 1995 led to the discovery of the losses. The Watford native pleaded guilty to fraud and was sentenced to six and a half years in prison.
The initial signs of problems in the credit markets were brought about by the collapse of the highly leveraged hedge funds of Matthew Tannin and Ralph Cioffi at Bear Stearns. The collapse resulted to losses amounting to around $1.6 billion.
Former copper trade head of Sumitomo Corp, Yasuo Hamanaka, spent a decade carrying out unauthorized copper trading that led to losses of up to $2.6 billion. Losses from the unauthorized copper trading resulted to the first loss of the giant trading company in 77 years, according to the New York Times. Hamanaka was sentenced to eight years for forgery and fraud in June 1996.
Long-Term Capital Management
After Russia defaulted on its debt in 2008, a market crisis ensued and resulted in losses amounting to $4 billion for Long-Term Capital Management. A $3.6 billion bailout for Long-Term Capital Management was provided by a number of companies with the support of the Federal Reserve Bank of New York. The bailout was sufficient to allow big hedge funds to liquidate their respective positions.
In 2006, hedge fund company Amaranth Advisors collapsed due to a $6 billion loss on bad natural gas trades made by 32-year old Amaranth trader Brian Hunter. The former hedge fund trader was fined $30 million by energy regulators in 2011 due to his role in the manipulation of natural gas futures market prices. The remaining portfolio of the Greenwich, Connecticut fund was picked up by another hedge fund, Citadel.
A number of illegal bets made by former Societe Generale Jerome Kerviel from 2005 to 2008 amounting to around $61.6 billion resulted to losses of up to $6 billion for the bank. The Wall Street Journal reported that the low-level trader was able to conceal risky trading for years. He was later convicted of forgery, unauthorized computer use and breach of trust.
The $9 billion trading loss in 2007 at Morgan Stanley is among the biggest in the history of Wall Street. The trades made by former Morgan Stanley trader Howard Hubler resulted in the dismissal of a number of senior officials of the company, including co-president of the bank, Zoe Cruz. The chief executive of the company at that time, John Mack, offered his resignation due to the debacle. However, he was allowed to keep his post by the board, according to individuals who had some knowledge about the matter. The loss resulted to the closing of the trading desks of traders who doubled down on the bets using the capital of the company.
These high-profile mistakes made by traders and investors are mainly due to a number of reasons. One reason is more much leverage than necessary. There are also instances when traders would deal with assets that they may not have adequate knowledge and expertise. It is also possible that these traders were given too much liquidity and trading capacity by banks without the taking their available capital into account. Fund managers themselves may also have too much leverage on the performance of certain funds. These mistakes may also result from an underestimation of how fat “fat tails” really are.
As investors, it is necessary to take the lessons from these mistakes into account. One lesson is to consider that the volatility of the market can last longer than the solvency of a trader. While the traders can be accurate at the start, they may be unable to make the necessary changes to maintain their position in the market. Hedge fund managers might consider taking advantage of low-cost and reliable financing, which may be used to generate optimal returns on investments. It is also important to take note that hedge fund blowups are typically treated fairly on Wall Street.
By taking these lessons into considerations, investors may avoid the same mistakes made by high-profile traders and make the most out of their investments. George Soros famously said that he became rich since he knew when he was wrong and he was able to survive after he recognized these mistakes.
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