When Genius Failed
This book is about the rise and sudden collapse of Long-Term Capital Management (LTCM), a spin-off of Salomon Brothers' bond arbitrage desk founded by John Merriweather (who also featured in Liar's Poker).
$1 invested in March '94 would have grown to $4 in four years, before falling to < $0.50 four months later. In this four month period the fund lost $4.6 billion.
The Rise
LTCM employed many smart people, including the Nobel laureats Myron Scholes and Robert Merton. Along with Merriweather's impressive track record at Salomon, this helped make their launch a success. They raised $1.25 billion making it one of the largest startups ever.
Its ~40% returns in each of their first two years helped establish the fund.
The Fall
LTCM relied on flawed models which worked under normal market conditions but failed under extreme events; specifically they underestimated their actual risk. This combined with their 25x leverage caused a quick downturn when unanticipated market changed caused huge losses.
Takeaways
Overconfidence is dangerous and attachment to your ideas causes complacency. Challenging your assumptions and reassessing your ideas will help you; this is especially true in finance as markets can quickly change.