Victor Niederhoofer: The Shoeless Trader
Copyright 2002/2003 by Mark M. Rostenko, Editor, The Sovereign Strategist:
Who says bear markets can’t be fun? Not to mention educational. In keeping with our commitment to provide valuable investment information and our unspoken commitment to providing good wholesome entertainment, we thought we’d combine the two with a new series of articles highlighting some of the drivel found in the mainstream financial press. There’s much to be learned by observing the habits of those who, shall we say, are less than ideally prone toward profitable investments. That’s not to say that the folks in this week’s installment fit that category. We’ll leave it to the reader to draw his/her own conclusions from the data provided. We used to gape in amazement at the incessant outpouring of bullish reports amid a major bear market, but now we find it just plain funny. Surely it must all be a joke because no one could seriously be bullish in a bear market. Well, except of course for Abby Joseph Cohen… The following is an interview that never happened, but had it happened, we’d like to think it would have gone something like this. In fact, this is a parody, although the comments in italics are actual and true statements, taken from a 6/13 MSN Money column written by Victor Niederhoffer* and some lady whose name we don’t quite remember. Rather than embarrass ourselves by misnaming or misspelling, we’ve generously provided you with the URL of the original article where you can read the full text for yourself: http://moneycentral.msn.com/content/p24708.asp. Please note that we are guilty of taking 100% of Mr. Niederhoffer’s comments totally out of context although we have altered none of them (save one or two words changed to keep things grammatically proper). In a bizarre twist of the time/space continuum, Mr. Niederhoffer’s answers were given on the 13th of June while our questions were asked on the 26th of June. Indeed, this is one crazy market.
TSS: Tell us Victor, what are some of your latest recommendations?
Vic: I bought WorldCom, Charter Communications, Vitesse Semiconductor, i2 Technology, Citrix System, Sanmina-SCI, and Nvidia on Monday for reasons that have less than usual to do with the scientific testing we like to do.
TSS: And what, pray tell, might these reasons be? Sheer ignorance of basic trading principles? Masochism? Perhaps you just thought the names were really cool? We can’t help but notice that these stocks are down an average of 32% in the less than two weeks since you first recommended them. What gives, Mr. Educated Speculator? It seems to us that any intelligent investor, upon simple perusal of a daily bar chart, would note the exceedingly obvious: these stocks are in vicious, unabated downtrends. We don’t see any reason to buy them.
Vic: True, they’re all Nasdaq 100 companies down 50% or more on the year with recent insider buying. We’ve found in the past that such companies perform slightly better than the 3- or 5-percentage-point advantage that insider buys show over insider sells.
TSS: In other words, you’re saying that they’re all losing stocks in sharp downtrends and in the universe of intelligent trading principles, you’ve decided to single out ‘insider buying’ as a good enough reason to take a position even though a simple perusal of the evidence will quickly demonstrate that insider buying is NOT a reliable indicator of future strength and it is DEFINITELY not a whole, complete nor viable trading strategy in and of itself. Is that right?
Vic: If you like everything tied up with string, with measures of uncertainty and full spreadsheet workouts, you’re going to be disappointed.
TSS: In other words if we don’t want to do the hard work of coming up with a viable investing methodology, if we want to trade on opinions, emotions, on vague and vapid concepts that have borne no fruit in the world of real-time investing and trading, if we want to lose a lot of money and blow out of the market in a very short time, if we want to follow the time-tested and proven road to bankruptcy that is bottom-picking, we must go ahead and buy these stocks cuz Uncle Vic says so?
Vic: No, what made me pull the trigger was the complete absence of hope about the market.
TSS: So in a world where people believe that stocks are not currently a good investment, where the market is skidding precipitously downward, you believe that it’s time to step in and buy because somehow, mysteriously, all that selling is going to make your stocks go up? Sorry – we interrupted. Please proceed.
Vic: People everywhere saying that no stock is safe. That they’re ready to throw in the towel, that investors have been betrayed, that executives can’t be trusted, that they’re greedy and shameful, that corporate financials can’t be trusted, that U.S. stocks are in freefall, that foreigners are just beginning to sell U.S. stocks because the dollar is weaker.
TSS: Pardon us. We mistakenly assumed that your strategy was based only on insider buying. Your actual strategy runs a bit deeper. It sounds like what you’re saying is that stocks are a buy when we’re in a nasty bear market, when corporate data is being falsified and every other week another executive is indicted for what amounts to fraud, when foreign capital is pouring out of the country and the dollar, the unit of exchange upon which our markets and economy hinge, is in a vicious downtrend. This begs a more personal question: Do you also think it’s a good idea to wait for the mayonnaise to go bad before eating it?
Vic: …there (is) something even worse than that. For a long time, there has been one person, a friend of great competence and stature, a Rukeyser elf, an adviser to major foreign banks, who I relied on to buck me up when I was blue. He’s always been a beacon of hope amid the shadows of fear and anxiety.
TSS: So then you’re not really into this game to make money. What you’re looking for is hope? Someone to buck you up when you’re blue? I guess that explains why you chose to lose 32% in two weeks. All that getting blue should, I suppose, entitle you to some beaucoup bucking up. (At this point, Mr. Niederhoffer went off on a very long tangent about one of his favorite films. Much like in his book where he often went off on irrelevant tangents that had about as much to do with educated speculation as cantaloupe rinds have to do with riveting a tin roof to a wooden shack.) Enough about pod people Vic. How about clueing us in on some of your other strategies?
Vic: Hitting a 40-day low point in the markets has led to an average rise of 1.5% the next day, over the past six years. Market pessimism provides the very basis for market optimism.
TSS: From where we’re sitting, a quick glance of the S&P 500 charts shows that a 40-day low point leads to a helluva lot lower lows. In fact it looks like the last 40-day low has led to something on the order of a new 190-day low and losses in the double digits. Helluva lot to risk for a mere 1.5% gain, wouldn’t you say? You say market pessimism provides the basis for market optimism. Hopefully, market losses provide the basis for market gains because if not, you’re in a very deep pile of financial doo-doo.
Vic: The stocks I bought were an expression of my own refusal to give up, an expression of a spirit of hope and belief in the growth and resilience and goodness of business. But also a statement partly based on counting and tested stock market and insider behavior patterns. Even now, as I write, I’m not sure that these stocks will go up. But this much I know: I’ll hold them until they go up or I need to pay the bills.
TSS: That’s all very interesting, but what has it to do with making money in the stock market? What sense does it make to hold losing stocks? What sense does it make to buck a firmly entrenched downtrend? Why buy stocks in a bear market when the money in bear markets is made by selling? Are you in the market to express your hope and faith or to make money? Isn’t church or synagogue the place to be expressing your faith and hope? How about the fellow who took the opposite side of your trades and is now 32% wealthier? I’d HOPE to be him and I have FAITH that fading your trades might very well turn out to be a profitable and tested stock market strategy. Oh and one more thing. Will you still be holding Worldcom when it goes completely bankrupt? And how will you pay your bills with worthless stock? And thus concluded our interview which never actually happened. Despite the fact that the interview never happened, there are nonetheless plenty of lessons to be gleaned from it:
- We’re a long way from the bottom as long as the financial commentators are still looking for the bottom. Especially financial commentators who by their own admission have lost fortunes.
- Buying into a downtrend is like trying to catch a falling knife. Never buck the trend, unless of course you’re planning to get a job as a commentator who wows his readers with stories of foolhardy disregard of basic trading principles. That job will come in handy if you plan to make a habit of tossing away 32% of your investment capital every two weeks.
- The market doesn’t care much about your hope, your principles or your tenacity. Only a fool or someone committed to financing the college tuition of the children of professional traders buys stocks as an expression of his emotional state. Professionals, consistent money-makers buy stocks when they are going up and sell them when they are going down. They trade for one reason and one reason ONLY: to make money. If you’re trading stocks for ANY other reason, I assure you, you will have your head handed to you on a plate by REAL traders who are eager to position themselves on the opposite side of your ignorance.
- If you want to express your hope and belief, do it the American way: make yourself a fortune in the markets and drive your luxurious new Hope-mobile and live in a mansion on Belief Street.
- NEVER make the mistake of thinking that insiders are any better at picking stocks than you are. Stocks are not companies and companies are not stocks. Just because someone knows his company intimately doesn’t mean he knows jack squat about when to buy and sell stocks. Corporate executives corporately execute. Traders trade.
From a review of Niederhoffer’s Education of a Speculator, reviewed by R.A. Swan – Chief Investment Strategist of CT Investment Management Group, comes this quote:
On October 27, 1997, Victor Niederhoffer and his partners were unable to meet a $50 million margin call. The event foreseen by a friend reading his forthcoming book, The Education of a Speculator, had come to pass. ‘It’s obvious that it’s only a question of time until you go under,’ Niederhoffer quoted with pride, scorn and false humility.