The Risk of Being the Smartest Guy in the Room: When Genius Failed

The Risk of Being the Smartest Guy in the Room: When Genius Failed

When Genius Failed: The Rise and Fall of Long Term Capital Management
by Roger Lowenstein
Pub. Date: October 2001, Random House
ISBN- 9780375758256
264 Pages
Success Rating:3

Why I Read this Book: This is an incredible lesson of the destruction caused by greed an arrogance. I thought it was fitting given what our economy is currently facing.


One of the biggest components of success is knowing what not to do. Like Charlie Munger often says “Invert. Always Invert,” it is incredibly helpful to understand what not to do in order to have a better vision of the right steps to take toward success. This is a perfect real-life example of what not to do and how over-confidence and greed can lead one to an incredibly dark place.

I first heard about this book from Warren Buffett in a talk he gave to a room full of Florida MBA students years ago. It was his example of how having brains does not always equal success, as the title intriguingly lets on. I first picked it up a year ago and was riveted. Lowenstein recounts the story in a way that will keep you in the book until the end. I even found my heart beating a decent clip in many of the chapters. But it was not until living through the past two months of economic meltdown that I found it incredibly relevant to bring to your attention.

I will warn you from the start that this is a finance heavy book and is not for the faint of heart, but the core message will serve any interested reader. The general premise is that a group of incredibly wealthy and successful economics and finance guys, led by John Meriwether, got together to start a hedge fund by the name of Long Term Capital. The credentials of these guys were unreal. A number of them were even economics Nobel Laureates. They were convinced that it would be next to impossible for them to fail at what they were doing. I think they put the odds of failure somewhere in the neighborhood of once in a universe. You can already see where this is headed. They raised billions of dollars and seemed to have a fool proof plan. The more they believed this, the more risky their transaction got, the more debt they took on and before long there was no turning back for them. Greed and arrogance had taken over.

Any of you who have come across this combination of traits in a person or business, can relate to how difficult it is to divert. And that’s just it. After a couple of years in the business, doing fantastic, they lost it all–$4 billion or so in total–in a matter of weeks. They were so convinced that they could not be beaten that they threw their common sense out the window. A major bailout was put together involving the worlds largest banks and even Buffett almost got involved.

These guys put all their net worths into the fund– a couple hundred million dollars, and as Buffett says, they risked what they did have and did need for something they didn’t have and didn’t need. Nothing in life is worth such a bet. No matter what the end goal is of success, there is never a reason to put your personal well-being and livelihood at risk, especially when it’s only for money. This should all be too obvious yet we see it happen all the time, be it with personal credit card debt all the way up to corporate governance.

Does this story at all sound familiar? Is this not exactly what happened to so many banks and mortgage companies over the past few months? They realized they could make a ton of money selling these mortgages to clearly under-qualified buyers and then the banks bought them and hedge funds invested in companies involved and the game was so juicy that many of them took out huge amounts of debt or leverage so that they could make even more money. More and more greed. Then all of a sudden the music stopped and people had no where to hide. The result as we’ve seen has been crashing markets, bankrupt banks that were once the backbone of our economy and people losing unreal amounts of money. And that debt they were using to invest and magnify their positions, only made the down side many times worse. We have seen some of the smartest people in the business go to zero, or lower. I even saw it last week with a good friend’s small hedge fund blow up. His boss got a little (and then a lot) carried away, but it can be so easy when everyone around you is doing the same foolish things.

What happened to Long Term Capital almost seems like a foreshadowing of what was to come for the economy as a whole ten years later. Yet who really heeded the warning? Clearly not many and certainly not enough. The craziest thing about it is that John Meriwether, the founder of Long Term Capital, despite leaving with his tail between his legs, before long was out there raising more money and running another fund. And if you google him, you’ll see that his new fund is again on the brink of failure. Unreal. Not only did the witnesses of the fall of Long Term Capital not take much of a lesson from it, but the geniuses behind the disaster did not even appear to learn their lesson. Maybe going broke was not painful enough to teach someone a lesson back then but I sure hope it is for the thousands who have learned the hard way this past summer. If not then it’s likely that so many of us will pay for it many years down the road–again.

As you read this book and realize the details that really lead to their failure, and take the lessons with you. When it comes to success, be it in life, business or anywhere, there’s no question that we must be critically focused on achieving what we have set out to do and be able to see that outcome crystal clear. But this is not to say that we should ignore the possibility of failure. In some rare cases it will seem like failure is impossible. Nothing is a sure thing and as soon as you believe it is, that is just when you’ll be taught otherwise. Be open to the fact that failure is possible and prepare for it, but don’t focus on it. And on that path, it is asking for trouble to take chances you cannot afford to lose. Meriwether (and his partners) putting all of his families net worth into his idea, as well as taking out debt to be even more heavily invested, left him no out. And as he did this, his transaction got more and more risky. It seems counterintuitive to increase your bets as the odds get worse, but when the mind is intoxicated with greed and the belief that failure is impossible, foolishness often prevails.

Sometimes we have to learn things the hard way, yet a key component to success is having the humility to learn from others’ mistakes whenever possible. In this case it could save you a fortune, both financially and personally. Learning what not to do on the road to success can often be the most valuable part of the journey. Take a minute to think, what past mistakes could you have avoided? And more importantly, which future mistakes will you prevent?

-Reading for Your Success

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