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Quote of the Day

“The people who are going broke in this situation are of two types: the ones who knew nothing, and the ones that knew everything.”

-Henry Kaufman. This day in history represents a day in which a special group of investors who “knew everything” began to lose it all…

July 12th – This Day in Stock Market History

 
July 12th, 1998 – Russia secures an $11 billion financial aid package from the IMF (international monetary fund) in an effort to halt its financial crisis.

Inflation is the country is skyrocketing, and capital is rapidly leaving the country.

The situation in Russia was pretty dire at the time:

Russian_inflation
Russian_Ruble_exchange_rate_chart_1995-2000
Russian_Stock_Market_Chart_1995-2001

Unfortunately, the loans would not bring calm to traders, investors, or those with money in Russia. The flight of capital would continue, and the country would be forced to devalue the Ruble and default on its debt just one month later on August 17th, 1998.

The Charts above come from a paper by the St. Louis Federal Reserve, which contains a lot more information on the Russian Financial Crisis for those interested: A Case Study of a Currency Crisis: The Russian Default of 1998

Best July 12th in Dow Jones Industrial Average History

1974 – Up 3.63%, 27.61 points.

Worst July 12th in Dow Jones Industrial Average History

1950 – Down 2.69%, 5.51 points.

Read of the Day

The Russian Debt Crisis of 1998 was also responsible for the most famous hedge fund failure in history.

Long Term Capital Management had an all-star team of traders, economists and managers. For year, it was the best performing hedge fund around. But as the Russian Crisis worsened, their bets and hedges soured. The resulting failure nearly led to a financial panic, and provides lessons that every investor should learn.

Warren Buffett would go on to say this about Long Term Capital Management’s failure:

“…It’s…an interesting story…The whole story is really fascinating because if you take John Merriwether, and Eric Rosenfeld, Larry Hilibrand, Greg Hawkins, Victor Haghani, the two Nobel Prize winners, Merton and Scholes, if you take the 16 of them, they probably have as high an average IQ as any 16 people working together in one business in the country…an incredible amount of intellect in that room. Now you combine that with the fact that those 16 had had extensive experience in the field they were operating in…In aggregate, the 16 had probably had 350 or 400 years of experience doing exactly what they were doing. And then you throw in the third factor that most of them had virtually all of their very substantial net worths in the business. So they had their own money up. Hundreds and hundreds of millions of dollars of their own money up. Super high intellect, working in a field they knew. And essentially they went broke. And that to me is fascinating….”

When Genius Failed: The Rise and Fall of Long-Term Capital Management

<– Go To Previous Day: July 11th: 1985 – Coca-Cola pulls ‘New Coke’ off the shelves, perhaps one of the largest marketing blunders of all time.