The World's Worst Trades

Published in Investing on 3 May 2011

Through bad character, bad decisions or bad luck, these six traders lost billions!

According to celebrated billionaire investor Warren Buffett, there are only two rules to investing:

Rule No. 1: Never lose money.

Rule No. 2: Never forget Rule No. 1.

Everyone's a loser

Of course, the world's most acclaimed investor -- dubbed the 'Oracle of Omaha' -- sometimes slips up.

Indeed, Buffett's worst investments have cost Berkshire Hathaway shareholders billions of dollars. For example, Buffett's purchase of Dexter Shoes in 1993 ended up losing $3.5 billion over the next eight years.

The simple fact is that all investors and traders -- no matter how rich or experienced -- sometimes screw up. However, in the words of billionaire hedge-fund manager and philanthropist, George Soros (this saying is sometimes attributed to Soros’s protégé, Stanley Druckenmiller),

"It is not whether you’re right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

Mr Market's biggest victims

Obviously, the biggest losses come when linked to leverage -- using borrowed money or derivatives to magnify your gains (or losses). Indeed, making big, bold bets with borrowed money can come spectacularly unstuck, as these six now-infamous traders found out to their cost.

(Losses are in date order and recorded in US dollars based on exchange rates at the time).

1. Hunting silver (1980; $1 billion)

The past fortnight has seen a surge in news reports regarding the price of silver, which has risen 150% in a year, reaching within a whisker of $50 an ounce.

The last time silver was this expensive was in 1980, when Texan billionaires Nelson Bunker Hunt and William Herbert Hunt tried to corner the market in silver. In the late Seventies, the Hunt brothers bought vast amounts of silver, at one point owning roughly $100 million ounces of the precious metal.

The Hunts' cornering effort saw the price of an ounce of silver soar from $11 in September 1979 to $50 four months later. However, following rule changes to leveraged investments in silver, the price plummeted (see Silver Thursday) and was back below $11 within two months.

As a result, the Hunt brothers lost over $1 billion. Oops.

2. Oranges and lemons (1994; $1.7 billion)

Robert Citron was the long-standing Treasurer of Orange County, California. In an attempt to boost the county's income, and egged on by US investment bank Merrill Lynch, Citron used billions of municipal dollars to take huge, leveraged positions in bonds and floating-rate notes.

Alas, these financial instruments are very sensitive to changes in interest rates. When the US Federal Reserve unexpectedly began raising interest rates from February 1994 onwards, Orange County's losses began to mount up. Eventually, its losses peaked at $1.7 billion.

As a result, Orange Country filed for bankruptcy in December 1994. In 1996, Citron was fined $100,000, but never served any jail time. In a wryly ironic twist, a 'citron' is a lemon-like fruit, making Citron something of a lemon.

3. Busting Barings (1995; $1.4 billion)

In bringing down Britain's oldest merchant bank, Barings Bank, Nick Leeson became the poster boy for rogue trading.

From humble beginnings in Watford, Leeson rose to become a leading derivatives broker for Barings in Singapore, trading equity futures on the Tokyo and Singapore exchanges. Sadly, when Leeson slipped up and made losses, he hid them in a secret account numbered 88888.

Following the Kobe earthquake in January 1995, Leeson's losses grew exponentially, so he fled overseas. Thanks to Leeson's losses of $1.4 billion, once-proud Barings was bought for £1 by Dutch bank ING.

Following a prison sentence and a brush with cancer, Leeson became CEO of Irish football club Galway United.


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4. Shocking SocGen (2008; $7.2 billion)

Jérôme Kerviel will forever be remembered as the man who blew a massive hole in the balance sheet of Société Générale, the highly respected French investment bank.

When Kerviel initially crossed the line from authorised to unauthorised trading, his early success allegedly racked up profits of €1.4 billion. However, Kerviel grew over-confident, eventually building up a colossal €50 billion position in European equity index futures.

When SocGen discovered Kerviel's rogue trading and began unwinding his position, it caused a mini-market crash, generating losses of €4.9 billion for the bank. In October 2010, Kerviel was sentenced to five years in prison, with two years suspended, but is appealing against his conviction.

5. Unnatural gas (2008; $6.5 billion)

Brian Hunter was a highly regarded trader at hedge fund Amaranth Advisors. Having spotted a durable seasonal anomaly in natural-gas prices, Hunter piled up huge profits for his employer and himself.

Alas, Hunter's position became too unwieldy; in some months, he bought the majority of all natural-gas contracts. As a result, he went from trading the market to being the market.

When gas prices plunged, Hunter's losses of $6.5 billion ended his career and finished off Amaranth in September 2007. Ironically, Amaranth is Greek for 'unfading'.

6. Mashing Morgan Stanley (2008; $9 billion)

Howard 'Howie' Hubler and his team at US investment bank Morgan Stanley were big players in the market for credit default swaps (CDS). In effect, these contracts are 'insurance policies' against debt defaults, with modest upsides but potentially huge downsides.

When US house prices began to slide in 2006, Hubler's trading desk continued buying up mortgage-linked CDS contracts. As the values of these home loans began to slump, Morgan Stanley's CDS losses skyrocketed, reaching $9 billion and forcing Hubler to resign.

For further reading about rogue traders and rash gambles, try The Rogue Traders' Gallery.

What has been your all-time worst trade or investment? Please let us know in the comments box below!


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johnnygibber 03 May 2011 , 7:40am

Speymill Deutsche Immob. (SDIC).
Jim Mellon owned 11 % plus and he's pretty savvy, big discount to NAV and Germany property is undervalued compared to rest of Europe.

What could possibly go wrong ?.......breaching banking covenants apparently......

B*&^er !! Down around 73% just now.


Luniversal 03 May 2011 , 1:00pm

You forgot Lloyds TSB and HBOS-- the worst single unforced error of judgement any British business has made in modern times, stampeded by panicky politicans, and one for which we've all had to pay.

AlysonThomson 03 May 2011 , 1:43pm

Luniversal - and YOU forgot RBofS, didn't you? Not to mention Northern Rock and God knows what else!

LeeJG 03 May 2011 , 2:31pm

It's about traders not whole organisations so they didn't foget these, they just were not writing about whole organisations!

mcturra2000 03 May 2011 , 2:45pm

Don't forget that Buffett actually said that Berkshire Hathaway was his worst investment of all time; and that if he gotten into an insurance instead of textiles, the company would probably be now twice as big.

Foxycreature 03 May 2011 , 2:53pm

Woolworths seemed a well respected High St Name with it's own property portfolio, and where I live was the biggest shop in town and always busy. MMMMmmmmm..... Put lots more into banks, my dad always said "Banks always make money whatever the economy does and bankers are very prudent with money". MMmmm again.. Plane Station was set to take off from Manston airport, the new hub for air traffic into Kent...... It's taken several years to try and get my portfolio back to it's original value, let alone the loss of income.

Stephen79 03 May 2011 , 5:16pm

HMV: down 78% and counting...! Not worth selling now; death or glory awaits! (One suspects the former...)

masudbutt 03 May 2011 , 8:29pm

Don,t forget fiddle by Investment Trusts Cos, in ZERO BONDS.
People have saved money for fees, pensions, etc.but lost most of it. Is there any protection for investments still, for zero bonds?

chattery 03 May 2011 , 10:50pm

And don't forget that these duff investments were made by people whom we are told should be paid excessive salaries for their brilliance!

Grakf 04 May 2011 , 1:38pm

AIG group?

and the chairman who went from Forbes richlist ($10bn) to nothing overnight.

Paul Reichmann Olympia and York is another one worth thinking about when they tried to develop out Canary Wharf.

forrado 05 May 2011 , 1:16am

Two TMT deals that went very wrong:

Hailed as The Deal of the Century in 2001, the Time-Warner AOL alliance that over the course of 9 years saw AOL’s subscriber base fall from 26-million to 5.4-million. By the time it came to the parting of the ways in December, 2009, AOL’s worth was only some 10% of its heady 2001 valuation. If there was ever a story of a company being seemingly oblivious to the needs of an increasingly long suffering customer base who finally lost patience and voted with their feet then AOL must take the Pulitzer Prize.

Even Rupert Murdock must realize by now that he has backed the wrong horse when during 2005 he forked out $580-million for Having in the intervening years been soundly thrashed by Facebook, Myspace is reportedly looking for a new owner with the odd $100-million to spare – but not surprisingly, as yet no takers at that price.

Sidekicker101 05 May 2011 , 10:43am

rule changes to leveraged investments i
ie, the bankers shafted them and took their money by changing the rules.

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