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Pig4bill,

I still feel like I am correct in the sense that you can run well in the stockmarket and run poorly as well. Sure you may have a great investment idea but just like in poker there are many things you cant control so variance comes into play. Fpr example, that sector of the economy heats up, the government passes some new legislation ect. ect. There are many things that can happen that will make you look like a genius or an idiot but a smart person realizes he is somewhere in between

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Long Term Capital Management was formed by the smartest people in the investment business including Nobel Peace prize winners. Initially they raked up returns approaching 40% per year using bond arbitrage strategies. The Russian Financial crisis led to a flight to quality and their arbitrage positions rather than converging, actually diverged. Exacerbated by heavy leverage huge losses ensued and the fund eventually failed.

These guys were very smart until the unforeseen (variance) happened.

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they were always smart (pre variance) and are still smart (post variance).

there is a big difference between being smart and being a great trader or portfolio manager.

1) they were farrrr to highly leveraged and used mostly historical correlations/volatilities as estimates of future corr/vol #s.

2) they had the same bet going on in thousands of different ways

3) they ventured into equity merger arb when they had no real expertise there and just applied the same arb model to it (but ehre there is no liquidity and moving out of it really moves the position)

4) they didn't have mutually beneficial relationships with prime brokers (their way or the highway) and they engaged in the same strategy with all their prime brokers (low cost, tons of leverage or we go someplace else).

intelligence and market knowledge only go so far. you have to transform that knowledge into trade ideas and manage them expertly.

blowing up doesn't make you any less or more smart...it does make you more wise.

Barron