Book Review: When Genius Failed

This book has all the elements of a story. We have development of a protagonist at the beginning, supporting characters, and a plot that moves along. The book traces the rise and fall of Long Term Management, a hedge fund that applied arbitrage at a scale never seen before. Along the way, they managed to shake up all of Wall Street with their hiring and investing strategies and the ways they leveraged capital.

But really, if this book was about finance, it would’ve soared over my head. It isn’t a story about arbitrage. It’s a story about arrogance.

The core of the plot is simple. A group of people found a new, unconventional way of making money. And at the beginning, they were seen as taking too big of a risk. So they bet on themselves, creating their own investment fund to apply the techniques others were afraid of.

And it worked! They made enormous returns as their model correctly predicted the market. So they doubled down, investing more and more money (with more leverage) to get higher returns. And they put all of their eggs in one basket.

But they got arrogant. At some point, their model failed (the assumptions stopped holding) and they lost money. And while the market’s downturn is what resulted in their monetary lsoses, they set themselves up for failure years earlier by borrowing many times their capital to invest, exposing themselves to risk, and assuming the market would keep playing by their rules.

I can’t speak much into the financial side of the story. But as a student, I see a lot of the same principles in my life. Students get good grades in a class and try to repeat the way they prepare, not questioning if new classes beg new ways of learning. Organizations keep doing whatever worked for them in the past, even as the climate of their campus shifts.

As we move through our lives, it’s hard to acknowledge that what’s been working will eventually stop working. We get blinded by our limited foresight, our lack of critical thinking, and, above all, our arrogance. When Genius Failed tells this story with incredible detail. People who are familiar with finance will certainly get a lot out of it. But I think it’s a relevant story for anybody who wants to stay dynamic in the way they live their lives.

If you'd like to purchase the book, it can be found here.