Big shots also crash: Some people bottom-fish and blow up their positions, while others lose decades of wealth in just one day.

This article is compiled from Qilehui.

Risks in the market are always present and everywhere. Traders should have risk awareness and remain vigilant at all times. Of course, they should not be afraid of risks, as they can be prevented and controlled. The first step in dealing with risks is to understand and be aware of them.

As we enter the final month of 2023, the A-share market continues to fluctuate, making it difficult for people to predict and grasp. The SSE Index has been fluctuating around 3000 points, and during this process, there have been constant voices of bottom-fishing in the market. Although most investors remain cautious, there are indeed many who can't resist the temptation and are eager to try.

But is bottom-fishing really that easy? Even one of the greatest investors in the world has had their fair share of "street fights" when it comes to bottom-fishing. Now, let's take a look at the mistakes made by these globally renowned investment gurus in the market.

1. Graham's Bottom-Fishing Bankruptcy

Graham is known as the "father of modern security analysis" and the "godfather of Wall Street". "Stock god" Warren Buffett, "P/E ratio pioneer" John Neff, and "index fund father" John Bogle are all his followers. However, even someone as outstanding as Graham couldn't escape the "black history" of investment failure.

In September 1929, the US stock market experienced severe fluctuations, but Graham, who was solely focused on making more money at the time, did not realize the seriousness of the problem. On October 24th of the same year, the most devastating stock market crash in human history occurred, known as "Black Thursday". In the following days, the market continued to plummet, and Graham, who did not withdraw in time, suffered heavy losses, not only giving back all the previous profits but also incurring a 20% loss.

Before the stock market crash, Graham was a millionaire. In the bull market of 1928, Graham's pre-tax income exceeded $600,000, making him an absolute millionaire. Graham lived a luxurious life, driving luxury cars and living in luxurious mansions.

At the peak of the bull market in early 1929, Graham rented a duplex apartment on the 18th and 19th floors of a magnificent 30-story apartment building on 81st Street and the west side of Central Park, complete with a balcony. These two apartments had a total of 10 rooms, and Graham himself couldn't even figure out how many bathrooms there were. There were also several maids' rooms near the top floor. The rent was as high as $11,000 per year, with a lease term of 10 years.

At this time, Graham's investment company proudly had a capital scale of $2.5 million, but between 1929 and 1932 (before the economic recovery), the company lost 70%.

In fact, there was a little episode in between. In early 1930, when the losses were not yet significant, Graham went to Florida to meet a businessman. The old man was already 93 years old and had been in business all his life. He told Graham not to waste time here and to quickly take the train back to New York to sell all the stocks, pay off the debts, and do what he should do. Unfortunately, Graham was very confident and missed the last chance to escape. In 1930, Graham believed that the stock market had returned to normal, so he was eager to recover his losses and started borrowing money to buy stocks at a low price, even using leverage on some of them. As Graham himself put it, "the so-called bottom was repeatedly broken, and the only characteristic of that great crisis was one bad news after another, getting worse and worse..."

By the end of 1932, he had only $550,000 left. At that time, there was no concept of long-term investment or value investment. The popular investment philosophy back then was "run fast." There were also individual investors who believed in the "god" of the stock market, such as a wealthy man named Bob Maroney, who trusted Graham so much that he entrusted millions of dollars to him for investment.

When Maroney needed the money to repay his debts and was in urgent need of cash, Graham told him that his money was basically gone. Maroney, an Irish tough guy, collapsed at that moment, completely losing control of his tears. Most of the clients withdrew all their money, Graham had no funds to manage, and the company was on the verge of bankruptcy.

Previously, Graham used to drive a luxury car to work, but after the stock market crash, he only took the bus, sometimes even walking a few extra stops to save a few pennies. During the bull market, when he made a fortune, Graham bought his mother a luxury car and hired a driver. After the stock market crash and huge losses, Graham had to sell the car he bought for his mother and dismiss the driver. He told his mother: "I can live without a car and a driver."

Many people believe that a thin camel is still bigger than a horse, and the concepts of rich and poor are relative—a poor person in New York may be a wealthy person in Africa. But for almost everyone, when they lose 4/5 of their wealth, no matter how much money they have left, they will consider it a disaster.

Graham said: "So many relatives and friends entrusted their wealth to me, and now they are suffering just like me. You can understand the frustration and almost despair I felt at that time, which almost drove me to the edge."

According to his memoir:

• 1930 was the worst financial year for the joint account, with a loss of 50%.
• For 5 years, there was no return from the joint account, and Graham relied on teaching, writing, and auditing to make a living.
• His marriage with Hazel had problems.
• In 1931, the joint account suffered another loss of 16%.
• In 1932, the joint account suffered another loss of 3% (losing 70% of the $2.5 million).

Graham was undoubtedly an investment master, but he also had his moments of failure. This tells us that in front of investment, everyone is equal, and everyone should tread on thin ice. We can see that what caused Graham's major failure was not just the stock market crash and buying at a low price, but the fact that he used all his assets to buy at a low price and even leveraged his investments in order to turn things around.

II. Buffett's Waterloo Incident

As Graham's disciple, Buffett, although he had many successful investments, was not invincible.

(1)

In 1986, Solomon Brothers' profits took a hit due to a significant increase in employee wages. Department heads and major shareholders of the company started to make trouble, and a corporate raider appeared, ready to acquire the company. In the midst of the crisis, John Gutfreund turned to Buffett for help. Warren Buffett has great trust in John Gutfreund and is grateful to him for his previous help to GEICO.

In 1987, Buffett spent $700 million to purchase convertible preferred shares of Salomon Brothers, which was the largest investment made by Berkshire Hathaway at that time.

As one of the primary dealers of U.S. Treasury bonds issued by the Federal Reserve, Salomon Brothers was qualified to directly bid and purchase Treasury bonds from the U.S. government, and then sell them to others to earn the price difference. Therefore, these major dealers almost monopolized the U.S. Treasury bond market.

Paul Mozer, head of Salomon Brothers' issuance department, exceeded the prescribed limit in two auctions in December 1990 and February 1991, bidding for Treasury bonds and hoarding them to squeeze companies that were short of "Treasury bonds".

In May 1991, Salomon Brothers was accused of submitting false client bids in the U.S. Treasury bond auctions between December 1990 and May 1991, and then converting the bonds won by the false clients into holdings, exceeding the legal limit of 35% for each broker.

This bond manipulation caused losses of over $100 million to other companies. Although this investment eventually made money, it consumed a lot of effort from Berkshire Hathaway.

On August 12, 1991, The Wall Street Journal published an article titled "Salomon Violated Rules on Treasury Bonds," and rumors began to spread. Subsequently, the situation became more serious, and the Treasury Department and the Federal Reserve believed that Salomon Brothers did not report in a timely manner and take further action, which was a serious contempt. The Treasury Department demanded the resignation of senior executives of Salomon Brothers, and John Gutfreund had to resign as chairman, causing the company's stock price to plummet.

The Treasury Department planned to appoint Buffett as chairman to save Salomon Brothers and avoid a financial market collapse. Buffett explained to the Treasury Department and the Federal Reserve that if they wanted him to serve as interim chairman of Salomon Brothers, the prerequisite was to revoke the announcement prohibiting Salomon from participating in Treasury Department auctions. Otherwise, this international company would file for bankruptcy, and the global financial market would fall into a domino effect and panic.

In an extremely urgent situation, the Treasury Department agreed to retain Salomon's bidding rights. With only a few hours before the stock market opened, Buffett assumed the temporary chairmanship of Salomon and selected a new CEO.

After taking office, Buffett began to reorganize the culture of Salomon Brothers, significantly reducing costs, hoping to gradually restore the company's reputation. Salomon Brothers was thoroughly investigated by regulators, and Buffett was summoned to testify before the Senate. Buffett was exhausted by the ordeal, but Salomon Brothers gradually improved, and the stock price slowly rose.

In June 1992, as Salomon gradually recovered, Buffett resigned as chairman of Salomon Brothers and returned to Omaha. After this rescue operation, Buffett's reputation soared and he became a hero in people's eyes.

(II)

In 1990, Berkshire Hathaway invested 12% of its shares in American Airlines, but the airline eventually stopped paying dividends to preferred stockholders. It is reported that Berkshire Hathaway's acquisition cost at that time was $358 million, which later shrank by 76% to $86 million.

However, compared to another investment made by Buffett, the above experience is nothing. In 1993, Berkshire Hathaway acquired Dexter Shoes for $433 million.

The biggest problem with this investment was not that Dexter Shoes became worthless a few years later, but that Berkshire Hathaway used its issued shares to pay for the purchase. At the time of the acquisition, Berkshire Hathaway's stock price was $16,765, and now the company's stock price has reached the $400,000 mark.

By this calculation, the value of the shares Berkshire Hathaway used to purchase Dexter Shoes has increased by 2,286%, reaching nearly $10 billion. It is worth noting that Berkshire Hathaway's market value at that time was only $19 billion.

In Buffett's investment, we should realize how important it is to stay vigilant. It was Buffett's arrogance in Dexter Shoes that caused Berkshire Hathaway to lose nearly $10 billion out of thin air.

(III) Niederhoffer: Losing Decades of Wealth in a Day

Victor Niederhoffer, a legendary figure on Wall Street, known as the "speculator guru," was once an advisor and trader for Soros and ranked among the top ten fund managers in the world.

In 1980, Niederhoffer established his own investment company, and his trading activities flourished, attracting Soros' attention with outstanding performance. Therefore, from 1982 to 1990, Niederhoffer became Soros' partner.

But the glory lasted only seven or eight years before Niederhoffer encountered a major setback in his investment career. In 1997, the Asian financial crisis broke out, and Niederhoffer believed that the Thai government would not let the stock price of state-owned banks plummet. So he bought Thai Farmers Bank, which eventually dropped to just a few cents, consuming a large amount of reserve funds.

After suffering heavy losses, Niederhoffer became even more desperate, hoping that higher-risk investments could compensate for the losses in Thai baht. By September, he had partially made up for the losses in Thai baht, but his investment performance for the year still fell by 35%. In October, he became even more audacious and sold put options on the S&P 500 futures.

On October 27, 1997, the "Black Swan" arrived. Influenced by factors such as the Asian financial crisis, the U.S. stock market plummeted, setting a record for the largest daily point drop in Wall Street history. Due to the excessive decline, the stock market had to be halted and closed early for the first time. Niederhoffer, who had made the wrong bet on options, was quickly engulfed by this tsunami. His funds were forced to liquidate, and investors lost over $100 million in assets. In just one day, Niederhoffer's decades of hard work were wiped out, and he suffered a major blow to his reputation.

After a long period of recovery, Niederhoffer regrouped and established the Matador Fund, accepting funds from overseas clients. From 2001 to 2006, Niederhoffer achieved an astonishing annual compound growth rate of 50%. However, the good times didn't last long. In the mid-2007, the U.S. subprime mortgage crisis erupted, and the Matador Fund suffered huge losses, wiping out its profits in an instant. And in September 2007, it was liquidated. Since then, only the legend of Niederhoffer has remained in the speculative world.

Some people attribute Niederhoffer's failure to his gambling nature. Soros also mentioned that after reading Niederhoffer's first autobiography, some readers predicted that he would fail, and indeed he did. In Niederhoffer's world, life is a gamble, and we are all speculators. Unless we lose money, then we are called gamblers.

IV. The Rise and Fall of Livermore

Speaking of gamblers, we naturally have to mention Livermore.

Livermore is known as the king of trading, the king of speculation, the bear king of Wall Street. His life is full of legends, with four rises and falls.

At the age of 14, Livermore, who came from a poor family, came to Boston alone and found a job copying stock prices at a stock trading company. After accumulating some savings, Livermore began to invest his money in speculative trading (similar to futures), and quickly made $1,000. So, Livermore quit his job as a copyist and devoted himself wholeheartedly to speculative trading.

As the money he earned in the trading business increased, the trading firms in Boston began to prohibit Livermore from engaging in speculative trading there. Helpless, he went to Wall Street, but at that time, Wall Street had already banned speculative trading. So Livermore started trading stocks. Due to his lack of understanding of stock trading, Livermore quickly lost all his money.

After going bankrupt, Livermore borrowed $1,000 from a friend and started speculative trading under a false name, quickly making back $10,000. With capital in hand, he began to study the stock market and quickly mastered the method of judging stock market fluctuations. In 1901, Livermore made $50,000 from investing in the Pacific Railroad. However, because the stock market's trading system at that time relied on paper tape to transmit information, which caused data delays, although Livermore could accurately judge stock prices, he still often suffered losses. In this way, he went bankrupt for the second time.

With no money, Livermore turned to speculative trading again and once again invested his earnings in the stock market. In 1907, Livermore made $250,000 by shorting the Union Pacific Railroad. That same year, he made $1 million in just one day by shorting. Later, he switched to going long and made another profit as the stock market rebounded, with personal assets reaching $3 million. However, by 1908, Livermore went bankrupt again because he went long on cotton and added to his position against the trend. In 1914, at the age of 35, Livermore was already in debt of millions and had no money to trade.

Later, a brokerage firm provided Livermore with a credit limit of 500 shares, and he seized this opportunity to turn the tide by shorting Bethlehem Steel. In 1929, before the arrival of the US financial crisis, Livermore shorted the US stock market and made a profit of one billion. That trade brought Livermore high returns but also caused him to suffer from severe depression and autism. Many stock investors who suffered heavy losses in that crisis blamed Livermore's shorting for the market crash. In the end, plagued by illness and the impact of family crises, Livermore made frequent trading mistakes and went bankrupt again.

Conclusion

The capital market is ever-changing, and for investors, it is crucial to calmly deal with continuous market adjustments and frequent account losses. Instead of holding positions in anxiety and impatience, it is better to patiently wait for opportunities and ensure that one does not end up being forced to exit the market.

Most people enter this market with the goal of getting rich quick, but the prerequisite for making money in the market is to survive. If one becomes complacent and overly confident in every trade based on a few successful experiences, and lets their guard down, they will inevitably face a deep abyss. After all, there is only one Warren Buffett in this market.