Shit happens and even the smartest people can get fucked, just look at the LTCM blow up. So of course it's possible.
It's impossible to eliminate all risk, regardless of the leverage ratio. I'm just saying that leverage isn't a reasonable proxy for risk. You have to dig deeper.
Well, possibly, but if you genuinely think that then you can never achieve anything other than complaining on message boards and hodling US treasury bonds. Everything has risks and it's a question of enumerating them and deciding how and whether to manage them.
Well I think we're in such uncharted territory here that it would be difficult to trust any risk model, so just increasing the margin may be hard to get right.
That really is the key question isn't it? I can see some ways out of that and some sets of companies (not many) where that would be the case but it's going to be hard to turn them around once they reach that stage. Maximum risk = maximum potential gain, it's never been any different.
If that is meant to be a joke, it’s actually quite funny. Good job.
If you meant that seriously, it’s extremely poor quality advice. Leverage is neither free nor cheap. And taking 100% leverage is obscenely risky. Your characterization of it as ‘risk free’ is the most dangerous part. At 100% leverage, small swings could lead to calls you simply cannot afford.
I think you're missing the point, of course in an ideal situation where risk is minimized that would be a good question. But by focusing on money I think you neglected to address the obvious point that I raised namely what if it blows up.
There was nothing fundamentally wrong with LTCM's business model, or with writing puts. Where they failed was in their execution - they underestimated the risk of fat-tails, and the level of correlation between different securities.
There are lots of cases where we do things that could potentially be catastrophic, but we do them anyway because the risk-reward justifies it. For example, going on a road trip instead of sitting at home and watching TV. The upside of going on a road trip is bounded (fun holiday) but the downside is catastrophic (deadly car crash). If we avoided every single activity that involved catastrophic risk, our lives would be far worse.
Size of the market doesn't change the risk you carry of wrong assumptions. Have LTCM if you want another spectacular failure of risk management with wrong assumptions like these. There's plenty more when you're done with that one.
It's impossible to eliminate all risk, regardless of the leverage ratio. I'm just saying that leverage isn't a reasonable proxy for risk. You have to dig deeper.
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