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Case Study #1 – Collapse of Barings Bank
The history of speculative trading gone wrong dates back long before
the Chicago Board of Trade came into existence in the 1850s to herald
the trade in stocks. One of the earliest cases that made the headlines
was the collapse of Barings Bank, one of the top investment banks of the
UK.
Nick Leeson, one of the bank’s investment managers and the man
credited to have single handedly bought the bank down, lost around $1.4
billion by investing the banks money on his market speculations.
Initially his speculations were spot on and made a $10 million profit
for the bank. However, his speculation that the Nikkei index of Japans
biggest stocks will remain steady and his subsequent investment in it
led to an enormous loss as the Kobe earthquake of January 1995 brought
the NIKKEI crashing down.
Case Study #2 – Long-Term Capital Management….And How They Failed
While one can argue that his was a special case since he couldn’t
predict an earthquake, we can hardly apply the same excuse when Nobel
Prize winning economists suffer similar losses. In 1997, Professor
Robert C. Merton of Harvard University and Professor Myron S. Scholes of
Stanford University, joint holders of the Nobel Prize for economics for
their method of determining the value of derivatives, developed a
formula for the valuation of stock options, in collaboration with
Fischer Black.
This formula has facilitated many modern stock market analysis tools
and methods. In 1998, Long Term Capital Management, a hedge fund where
these two were principal shareholders had to be rescued at the cost of
$3.5 billion, since its collapse would have affected the global
financial markets severely. Obviously, even the pioneers of today’s
stock market analysis tools couldn’t predict their own downfall.
Case Study #3 – Fall of Enron
In the 21st Century we have a number of cases where stock market
analysis failed and brought corporate giants to their knees. There were a
number of cases involving stock market fraud as well, like the case of
ENRON that impacted the economy. This company had built its reputation
as the world’s biggest energy trader simply by manipulating the books.
It had a huge effect on the economy as people rushed to sell its highly
priced stocks within minutes of the story hitting the press.
Case Study #4 – Massive Losses for China Aviation
In 2004, China Aviation lost a staggering $550m by trading according
to market analysis which failed to predict the downturn in the aviation
industry caused by combination of bad weather and the worsening global
economic climate.
Case Study #5 – Downfall of Amaranth Advisors
Amaranth Advisors, traders in energy stocks made a fortune in 2005 by
placing bullish bets on natural gas market, which was bolstered by the
effect of Hurricane Katrina on natural gas production and delivery.
The company predicted a similar trend in 2007-2008 and ended up
losing $6 billion in less than a month as contract prices in the energy
market fell drastically. This again proves that market analysts deliver
consistently.
The year 2007 also saw the beginning of the biggest global financial
meltdown since the great depression, as US and UK economy were hit by
credit crunch, resulting from risky trading by Banks and Credit Card
companies. Investigations into the meltdown have revealed how industry
analysts not only failed to predict this crash, some of the market
analysis and speculations were even responsible for magnifying the
meltdown.
To sum up we can say that while market analysis can be correct
sometimes, it has been wrong quite often and with disastrous results.
Therefore, trading based on stock market technical analysis can be
considered as safe as trading without such input.
Case Study #1 – Collapse of Barings Bank
The history of speculative trading gone wrong dates back long before
the Chicago Board of Trade came into existence in the 1850s to herald
the trade in stocks. One of the earliest cases that made the headlines
was the collapse of Barings Bank, one of the top investment banks of the
UK.
Nick Leeson, one of the bank’s investment managers and the man
credited to have single handedly bought the bank down, lost around $1.4
billion by investing the banks money on his market speculations.
Initially his speculations were spot on and made a $10 million profit
for the bank. However, his speculation that the Nikkei index of Japans
biggest stocks will remain steady and his subsequent investment in it
led to an enormous loss as the Kobe earthquake of January 1995 brought
the NIKKEI crashing down.
Case Study #2 – Long-Term Capital Management….And How They Failed
While one can argue that his was a special case since he couldn’t
predict an earthquake, we can hardly apply the same excuse when Nobel
Prize winning economists suffer similar losses. In 1997, Professor
Robert C. Merton of Harvard University and Professor Myron S. Scholes of
Stanford University, joint holders of the Nobel Prize for economics for
their method of determining the value of derivatives, developed a
formula for the valuation of stock options, in collaboration with
Fischer Black.
This formula has facilitated many modern stock market analysis tools
and methods. In 1998, Long Term Capital Management, a hedge fund where
these two were principal shareholders had to be rescued at the cost of
$3.5 billion, since its collapse would have affected the global
financial markets severely. Obviously, even the pioneers of today’s
stock market analysis tools couldn’t predict their own downfall.
Case Study #3 – Fall of Enron
In the 21st Century we have a number of cases where stock market
analysis failed and brought corporate giants to their knees. There were a
number of cases involving stock market fraud as well, like the case of
ENRON that impacted the economy. This company had built its reputation
as the world’s biggest energy trader simply by manipulating the books.
It had a huge effect on the economy as people rushed to sell its highly
priced stocks within minutes of the story hitting the press.
Case Study #4 – Massive Losses for China Aviation
In 2004, China Aviation lost a staggering $550m by trading according
to market analysis which failed to predict the downturn in the aviation
industry caused by combination of bad weather and the worsening global
economic climate.
Case Study #5 – Downfall of Amaranth Advisors
Amaranth Advisors, traders in energy stocks made a fortune in 2005 by
placing bullish bets on natural gas market, which was bolstered by the
effect of Hurricane Katrina on natural gas production and delivery.
The company predicted a similar trend in 2007-2008 and ended up
losing $6 billion in less than a month as contract prices in the energy
market fell drastically. This again proves that market analysts deliver
consistently.
The year 2007 also saw the beginning of the biggest global financial
meltdown since the great depression, as US and UK economy were hit by
credit crunch, resulting from risky trading by Banks and Credit Card
companies. Investigations into the meltdown have revealed how industry
analysts not only failed to predict this crash, some of the market
analysis and speculations were even responsible for magnifying the
meltdown.
To sum up we can say that while market analysis can be correct
sometimes, it has been wrong quite often and with disastrous results.
Therefore, trading based on stock market technical analysis can be
considered as safe as trading without such input.
