Chapter 2Simple Models Typically Beat the Experts

“We have to tell Jon that enough is enough. We need to take the keys away from him.”

—The Treasurer of MF Global's parent company1

Several years ago, David had been reading a lot of investing books and decided that he wanted to experiment with some strategies he thought looked promising. David, armed with a Wharton MBA and over 20 years as a financial professional, felt he could make some money in the commodities and futures markets. He familiarized himself with the workings of the futures markets, and established a trading account at MF Global, a major commodity futures and derivatives broker.

When David transferred a block of capital to MF Global and began trading, he was relying on the expertise of the firm's CEO, Jon Corzine, to ensure the firm could execute trades and clear transactions, carefully maintain the segregation of customer accounts from proprietary brokerage funds, and perhaps most important of all, keep the firm solvent. David assumed he had nothing to fear with Corzine running the firm, since Corzine—a Goldman Sachs wunderkind and ultra-sophisticated bond trader—was just the kind of financial expert you would want at the helm.

David was therefore stunned when MF Global declared bankruptcy in late 2011. Then, a short time later, came another surprising development: the bankruptcy trustee announced that a $1.2 billion shortfall had been discovered in customer accounts. David wanted his capital returned, but no ...

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