An early stock market lesson for me was:-
Never ever ever be a weak holder!
What this usually means in practice is: don’t overpay for an asset.
Now, it is my observation that, in an increasingly computerised world, human marketplaces are becoming better at doing what they do best.
Eliminating weak holders.
Common ways to do this include:
But why stop there; when The Credit Crunch enables you to run the whole register.
This leads me to the ‘Stranger Than Fiction’ run on
the investment bank The Bear Stearns Companies Inc. (NYSE:BSC).
Bear Stearns’ own risk management went pear shaped by doing too much business with its main clients, “The Hedge Funds”.
Yes, these same Hedge Funds when faced with losses just shorted their own counter party risk, a lay down misère.
To add insult to injury, they also withdrew all new business from Bear Stearns.
A killer blow!
Bear Stearns management failed to see that despite their size they had become “The Short Stack” in a high stakes game of marketplace poker.
Null.
Eerily similar to Long Term Capital Management. Too much leverage via repo financing led to them being the weakest holders in the world.