They say those that forget history are doomed to repeat it. [They also say history never repeats, it only rhymes].
A hedge fund called Amaranth reportedly lost about 4.5 billion in 2 weeks when a 32 year old trader apparently bet the farm on natural gas futures. When you have a huge position in a shallow market, the rest of the market is bound to know. And just like the billionaire Hunt brothers who tried to corner the silver market and went BK, the market rallied against him and he lost big time. Also like Long Term Capital Management[Read the extremely interesting story here], Amaranth will likely go under because of this. And also like the Bearings bank, this astounding loss can be attributed to one person.
What are the lessons we can take away?
– never bet against the market.
– never bet the farm.
– don’t put all your eggs in one basket.
– don’t forget history.
– use leverage with extreme caution
– don’t become arrogant just because you got lucky a few times.