Welcome to Money for the Rest of Us.

This is a personal financial show on money, how it works, how to invest it, and how to

live without worrying about it.

I'm your host, David Stein, today is episode 451.

It's titled, How Much Should You Invest in Stocks?

The Art of Position Sizing in a Volatile Market.

Back in the mid-1990s, one of the most successful hedge funds was long-term capital management.

The fund was founded in 1994 by two Nobel Prize laureates, Miron Shoals and Robert Merton,

along with a number of very smart traders from Solomon Brothers, including John Murray

Weather and Victor Harani.

The initial amount of capital raised was very large for a new hedge fund, a billion dollars.

The returns in the first three years were incredible.

The net of fee return from inception through 1997 was 31.2% annualized.

The fund never lost money two months in a row and grew to $7.5 billion, one of the largest

hedge funds in the world, even though it was closed to new investors since mid-1995.

Long-term capital management's investment approach exploited the price differences between

various financial instruments such as government bonds, corporate bonds, stocks, currencies.

The strategy is known as relative value arbitrage, and the idea is that while related securities,

their prices might diverge for a short time due to supply and demand imbalances that ultimately

the prices converge to their true relative value.

Each individual bet on its own if unlevered wasn't very risky, but the fund used a great

deal of leverage in order to magnify the returns of these small bets.

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