When the markets were shaken by the Russian situation, a lot of the normal relationships between different markets were thrown off — say, the relationship between the prices of corporate bonds and treasury bonds. When these relationships get out of line, they can be a profitable opportunity because eventually they can be expected to return to normal. But this time they did not return to normal or, at least, not soon enough. The analytical system that Long-Term Capital Management used to exploit such opportunities works 99.9 percent of the time. But because they had borrowed so heavily, that very unusual deviation of the markets, which might occur 0.1 percent of the time, caused them almost to run out of capital…

If Long-Term Capital had been forced to liquidate, the deviations from the normal behavior of bonds and other investments would have been even greater and the effects on the banks would have been even worse. That is why the New York Federal Reserve intervened. One really interesting thing is that it showed how faulty are the methods banks use to assess and manage risks. — George Soros (source)

The really hard part about investment policy is not figuring out the best feasible combination. While it takes some time and analytical discipline, this part of the problem-solving is far from advanced science.

The really hard part is managing ourselves: our expectations and our interim behavior. Walt Kelly’s Pogo puts it as “we have met the enemy and he is us.” Most investors are too optimistic about the long run and much too optimistic about how well they will do compared to the averages, so they set themselves up for disappointment.

Even worse, most investors do harm to their longer-term investment results by trying and trying again to do better: changing managers and changing asset mix at the wrong time and in the wrong way. — Charles Ellis (source)

My ability to forecast the market is no better than anybody else’s, which means it’s quite poor. Some people are successful in calling one or two or even three turns in a row, but they are even worse off than I am because once somebody thinks he can forecast the market he tends to put increasing amounts of money behind his opinions. When he finally makes a mistake, he really gets destroyed…

As I said, I don’t know what the market is going to do. I don’t think most people are any good at forecasting swings either, so I think this leaves you with only two ways of approaching the market. In the first, you remain fully invested at all times, and every once in a while you stand up and take your losses like a gentleman. The other involves following a formula of one sort or another. — Robert Wilson (source)

Some years ago I was the adviser to a profit-sharing trust for a large commodities dealer, I bought for them — I think the stock has been split 15 times since then — a block of Texas Instruments at $14 a share. When the stock got up to $28, the pressure got so strong (“Well, why don’t we sell half of it, so as to get our bait back?”) I had all I could do to hold them until it got to $35. Then the same argument: “Phil, sell some of it; we can buy it back when it gets down again.”

That is a totally ridiculous argument. Either this is a better investment than another one or a worse one. Getting your bait back is just a question of psychological comfort. It doesn’t have anything to do with whether it is the right move or not.

But, at any rate, we did that. The stock subsequently went above $250 within two or three years. Then it had a wide open break and fell to the mid-50s. But it didn’t go down to $35. — Philip Fisher (source)