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Quote of the Day
“The mood at Long Term [Capital Management] was relaxed, too. Though the fund’s leverage was up…the partners had seemingly tailored the fund’s portfolio to control the risk. According to their models, the maximum they were likely to lose on any single trading day was $45 million – certainly tolerable for a firm with a hundred times as much in capital. According to these same models,, the odds against the firm suffering a sustained run of bad luck – say, losing 40% of its capital in a single month – were unthinkably high. Indeed, the figures implied that it would take a so-called ten-sigma event – that is a statistical freak occurring one in every ten to the twenty-fourth power times – for the firm to lose all of its capital within one year.”-Quote from Roger Lowenstein “When Genius Failed”.
September 23rd – This Day in Stock Market History
September 23rd, 1889 – Nintendo is founded.
Originally, the company was founded as a producer of playing cards. However, as playing cards began to fall out of fashion in the mid 1950s, Nintendo started looking for business ideas elsewhere.
Today, the company is worth $45 billion.
September 23rd, 1998 – Long Term Capital Management is bailed out with a $3.6 billion investment by a group of 16 financial institutions.
Long Term Capital Management, staffed by Nobel prize winners, Harvard professors, and an assumed next-in-line federal reserve chairman, held over $4.7 Billion in assets just months earlier.
Due to the company’s high leverage, it would take just 5 weeks for them to lose nearly all of their equity, despite their risk models calculating a mere 1/10^24 chance of the company losing all its money. Long Term had $129 billion in assets and over $1.2 trillion in derivatives at its peak.
Their models painted a rosy picture, but when turmoil hit that markets in mid 1998, their fund performed quite different than imagined. They envisioned a worse case scenario of a $45 million loss in a single day.
On August 21st, the fund lost $553 million
On August 27th, the fund lost $277 million
The month of August, the fund would lose $1.9 billion.
On September 21st the fund would lose another $553 million
In the end, investors would see a 92% drop in the fund’s value from its peak.
Best September 23rd in Dow Jones Industrial Average History
1931 – Up 6.02%, 6.59 points.
Worst September 23rd in Dow Jones Industrial Average History
1901 – Down 3.10%, 1.58 points.
Read of the Day
Nintendo also makes an appearance in a new book from David Epstein, titled: Range.
As described above, Nintendo got its start with playing cards, however by the mid 1965s that business was struggling.
Thankfully – Nintendo hired a new project engineer around that same time, Gunpei Yokoi, who would be monumental in shaping the company’s future. His way of thinking is evident even in Nintendo’s latest products nearly 60 years later.
An executive caught [Yokoi] messing around with a gripping tool he’d made in his spare time at work and asked him to develop it into a toy.
Yokoi rose in the ranks after the toy’s success, playing an important role in the development of the Game Boy, where his lack of engineering experience helped him resist the pull toward the newer technology their competitors were trying.
You can read more about Epstein’s book here, with a review from NPR: https://www.npr.org/2019/05/28/725755061/range-argues-that-specialization-should-not-be-the-goal-for-most