Long-Term Capital Thinks in Probabilities, Not Predictions

Investment decisions with a high probability of being correct are not based on subjective guesses or market sentiment, but rather on historical patterns, data verification, and logical deduction, demonstrating a stable win rate over the long term. It doesn't aim to be "right every time," but through continuous repetition, ensures that "the number of correct decisions far exceeds the number of incorrect ones," ultimately accumulating certain returns. The core concept of Long-Term Capital Management (LTC) indeed emphasizes probabilistic thinking rather than attempting to accurately predict the future. This strategy acknowledges the uncertainty of the market and makes decisions by assessing the probability of different outcomes and their potential impact, thereby achieving robust returns in the long run.


The characteristics of LTC mainly include the following:

  • Long investment cycle: LTC has a long investment cycle, typically exceeding one year, and can even reach several years or longer.
  • Low flexibility in capital utilization: Due to the long investment cycle of LTC, its utilization flexibility is low; access to funds is limited by financial conditions and the overall product's scope.
  • High financing risk: LTC faces higher financing risk because its long repayment period may expose it to more uncertainty and risk. - High cost of capital
  • Long duration of impact on the enterprise
  • Slow capital recovery
  • High risk of exposure

What is long-term capital?

Long-term capital refers to capital that a company needs for a period of more than one year. It typically includes various equity capital and debt capital such as long-term loans and bonds payable; this is long-term capital in a broad sense.

How to calculate the long-term debt-to-equity ratio?

The long-term debt-to-equity ratio is the ratio of a company's long-term debt to its long-term capital, reflecting the company's long-term solvency. The lower this ratio, the stronger the company's long-term solvency, the better the protection of shareholders' rights, and the higher the safety of creditors.


The formula for calculating the long-term debt-to-equity ratio is:

Long-term debt-to-equity ratio = [Non-current liabilities / (Non-current liabilities + Shareholders' equity)] × 100%.

Importance Manifestations

  • Financial Soundness: Reduces liquidity risk and supports long-term corporate development plans.
  • Leverage Effect: Enhances return on equity through long-term debt financing.
  • Risk Mitigation: Maintains operational stability during economic fluctuations.

Long-Term Capital Management Considers Probability

  1. Advantages of Probabilistic Thinking:

Investment masters like George Soros focus on "odds" rather than the accuracy of predictions, measuring how much profit can be made if the judgment is correct and how much loss will be incurred if it is wrong. This approach allows for long-term profits even if predictions are wrong, thanks to favorable odds.

  1. Coping with Uncertainty:

Markets are influenced by complex factors such as economic cycles and geopolitics, making them impossible to fully predict. Therefore, Long-Term Capital Management emphasizes building portfolios that can adapt to various scenarios, such as Bridgewater Associates' "All Weather Strategy," which uses risk diversification to cope with unknown shocks.

  1. Psychological Preparation and Practice:

Learning to coexist with volatility is key. Masters do not panic due to short-term fluctuations but rather view uncertainty as part of investing. For example, Warren Buffett never predicts economic trends but focuses on holding high-quality assets, relying on long-term compound growth. This probability-based approach enables investors to respond more rationally to the uncertainty of the future, avoiding overconfidence or ignoring extreme events (such as black swan events).

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