Practical Speculation E-Book

Victor Niederhoffer

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 647

Veröffentlichungsjahr: 2011

Beschreibung

The follow-up to Victor Niederhoffer's critically and commercially acclaimed book The Education of a Speculator has finally arrived. Practical Speculation continues the story of a true market legend who ran a hugely successful futures trading firm that had annual returns of over thirty percent until unforeseen losses forced him to close operations. Like a phoenix rising from the ashes, Niederhoffer returned to the world of trading stocks, futures, and options, with a new colleague and a new approach and found success. Order your copy of this compelling story of risk and survival today.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Epigraph

Acknowledgments

Introduction

To Overwhelming Applause

The Framework for This Book

Explanation of Icons

Part One - Mumbo Jumbo and Moonshine

Chapter 1 - THE MEME

Chapter 2 - EARNINGS PROPAGANDA

Fuzzy Measures

Testing the Beliefs

Irrational Ratios

Student Questioner

How Earnings Propaganda Works

Why Do the Beliefs Persist?

The Escalation of Hide-and-Seek

Wall Street’s Cheery Analysts

Final Note

Chapter 3 - THE HYDRA HEADS OF TECHNICAL ANALYSIS

Is the Trend Really Your Friend?

Testing for Trends

Streaks in Sports

The Market’s Momentum Pendulum

Have Things Changed?

A Venerable Indicator of Great Ambiguity

The Hydra’s Arms

If There Is Proof, We Cannot Find It

A Disagreement That Speaks Volumes

Shouldering Ahead

Hypothetical Head-and-Shoulders Pattern

Did You Really Expect a Straight Line to Point the Way?

Propaganda Aspects of Technical Analysis

Why Does the Myth Persist?

A Technical Approach That Can Be Tested

Testing the VIX Indicator

Conclusion

Epilogue: Ode to the Hydra of Trin

Chapter 4 - THE CULT OF THE BEAR

Skepticism, Science, and Self-Esteem: A Multitrillion-Dollar Case Study

The Critic’s Story

Comfort and Fear

Taxonomy of the Oeuvre

Chapter 5 - “WE ARE NUMBER ONE” USUALLY MEANS “NOT MUCH LONGER”

The Tale of Icarus

The Corporate Story Board

Cisco’s Storyteller

The Executive Boast

Hubris and Chutzpa

It Ain’t Boasting If You Can Do It

Hunting for Humility

So Much for Celebrity

Just What Is Humble?

The Skyscraper Indicator

An Architect’s Opinion

Best Use, or Boast?

The Magazine Cover Indicator

The Stadium Indicator

Making Mischief with the Books

Lords on Boards

Summing It All Up in Iambic Pentameter

Chapter 6 - BENJAMIN GRAHAM: MYTHICAL MARKET HERO

Illusory Bargains

Performance Test

Value’s Dismal Performance

Chapter 7 - NEWS FLASH: COMPUTER WRITES STOCK MARKET STORY!

Harm Done

The Market News-O-Matic

Part Two - Practical Speculation

“First, Build a Palace for Your King”: A Survival Lesson from a Chess Master

Chapter 8 - HOW TO AVOID SPURIOUS CORRELATIONS

How to Build a Scatter Diagram

A More Accurate Measure

A Workhorse Equation

Avoid Fallacious Conclusions

The Curse of Specious Correlations

Chapter 9 - THE FUTURE OF RETURNS

The New Forecasters

Second Opinion

Chapter 10 - THE PERIODIC TABLE OF INVESTING

Begin with the Facts

A Classification System for Stocks

How Valuable Is Value Line?

Value Line’s Other System

The Critics

Mr. Hill Strikes It Rich

A Mind Still Open after 58 Years

Chapter 11 - WHEN THEY SWING FOR THE FENCES, WE RUN FOR THE EXITS

Playing to the Crowd

New Century, New Game

Chapter 12 - BOOM OR BUST?

Promoting REITs

REITs versus Stocks

Interlocking Gears: Real Estate, Business Cycles, and Stocks

We Make a Bearish Call

Wrath of the REIT Advocates

Untimely Optimism

The Ground Shifts

Chapter 13 - MARKET THERMODYNAMICS

Market Experiments versus “Market Feel”

Money as Energy

The First Law of Thermodynamics: Conservation of Energy

The Second Law of Thermodynamics: Entropy

Conclusion

Chapter 14 - PRACTICAL MARKET LESSONS FROM THE TENNIS COURT

Before the Game

During the Game

The Endgame

Chapter 15 - THE FINE ART OF BARGAINING FOR AN EDGE

TRADERS!

Watch Your Costs

Pick Your Time and Place

Keep a Doleful Mien

Information Is Valuable

Sex and Bargains Do Not Mix

Chapter 16 - AN AMIABLE IDIOT IN THE BIOTECHNOLOGY REVOLUTION

I Know This Crazy Guy ...

The Old Phase 2

The Trader’s Apprentice

The Invisible Victim

The Trial

Profit from Asymmetry

The Niederhoffer-Kenner-Zhang Drug Trials

Chapter 17 - EARNINGS IMPOSTORS

Cash Money

Buybacks

Dividends

Up with Dividends

Dividend Yields and the Market

Cash Indicators

Cash Money

Empty Shelves, Rising Stock

Compustat Confusion

A Combination Tell

Chapter 18 - FINALE

Technical Indicators

Where Do We Find All Our Experts?

More about Ever-Changing Cycles

Gone Fishing

How Can You Say Such Awful Things about Alan Greenspan?

What Book Do You Recommend?

Beating Pods and Pessimism

Hope—And Some Time-Tested Principles

AFTERWORD

NOTES

INDEX

More Praise forPractical Speculation

“Practical Speculation distills an unusual breadth of hard-won (and costly) experience and insight into an immensely readable and instructive book. Bulls and Bears are drawn and quartered alike by the authors’ exquisitely honed quantitative scalpel.”

Stephen M. Stigler Professor of Statistics University of Chicago

“In my judgment, Victor Niederhoffer is the single most insightful speculator in the world. This new book displays Victor’s unique gift for recognizing the subtle confluence of seemingly disparate events. Although this book is partially a guide on investment strategy, it is principally a remarkable explanation of market function.”

Herbert London John M. Olin Professor of Humanities, New York University President, Hudson Institute

“Whatever Victor Niederhoffer writes is worth reading—not once but at least twice. His analysis of markets is as brilliant as it is unorthodox. Readers will discover a host of nuggets in Practical Speculation that will stretch their minds and tease their imaginations.”

Lawrence S. Ritter John M. Schiff Professor of Finance Emeritus New York University

“Victor Niederhoffer outdoes himself beginning with the first paragraph of the introduction. Victor and Laurel uniquely see the interrelationships and dependencies among the complex factors that are daily life and are able to interpret observations in terms of how people will react to the sequences of events. Practical Speculation is an extraordinary insight into the thinking of probably the most original thinker of our time.”

Kenneth W. Rendell Founder, Kenneth W. Rendell, Inc.

“Vic and Laurel are breathtakingly insightful. They paint on a global investment canvas stretching across space and time. This is their dazzling journey through the art, science, sport, and literature of investing. Don’t risk a penny on stocks until you have read Practical Speculation.”

Professor Elroy Dimson, London Business School Co-author, Triumph of the Optimists

Copyright © 2003 by Victor Niederhoffer and Laurel Kenner. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Niederhoffer, Victor, 1943-

Practical speculation / Victor Niederhoffer, Laurel Kenner. p. cm.

Includes index.

ISBN 0-471-44306-9 (alk. paper)

1. Speculation. 2. Stocks. 3. Investment analysis. I. Kenner, Laurel. II. Title.

HG6041.N52 2003

332.63’2—dc21

2002190747

A fragment of a wartime speech moved through my mind: ‘We shall fight them in the fields, and in the streets, we shall fight in the hills; we shall never surrender.’ True then for one people, it was true always for the whole human race.

—Invasion of the Body Snatchers

From My New York by Kathy Jakobsen.

Copyright © 1993, 2003 by Kathy Jakobsen. By permission of Little, Brown and Company, (Inc.).

ACKNOWLEDGMENTS

This book was written from the firing line. Most of the ideas were subjected not only to the pitiless judgment of the market itself but also to the critiques, often withering, by readers of our columns for CNBC Money, worldlyinvestor.com, and thestreet.com.

The list of those who helped us accomplish our writing task amid the daily fray is long. Almost everything in this book benefited from the insights of our editor at CNBC Money, Jon Markman. Pamela van Giessen, our editor at John Wiley & Sons, inspired this book and shepherded it through many iterations.

Our thinking was sharpened and augmented by the daily discussions on our Speculators’ List, a group of extraordinary individuals who read and responded to our columns and then accepted our invitation to join a philosophical e-mail forum in the spirit of Ben Franklin’s junto. We are deeply grateful to James Goldcamp, who put the list together for us. From an original membership of fewer than 10 people, the Speculators’ List now encompasses more than 150 experts on diverse subjects, united by a common interest in markets, statistical analysis, and mutually beneficial discussion. Dr. Brett Steenbarger, whose contributions appear throughout this book, was among the early readers who became dear friends. Our thinking and our lives have been enriched by Gitanshu Buch, Henry Carstens, Duncan Coker, Nigel Davis, “Mr. E,” Bill Egan, Glenn Escovedo, Ed Gross, Bill Haynes, David Hillman, James Lackey, John Lamberg, Paul Lewis, Alix Martin, Mark McNabb, Shui Mitsuda, Bipin Pathak, Tom Ryan, Ken Sadofsky, Dick Sears, Russell Sears, Saurabh Singal, Don Staricka, Gary Tate, Jack Tierney, and Steve Wisdom, to name only a few. There are many other eagles too numerous to mention.

Market Warriors (Artist: Susan Slyman, 2000).

The traders in Vic’s office contributed research and analysis in addition to their daily duties. Shi Zhang and David Ciocca produced many of the studies and scatter diagrams. Patrick Boyle researched the chapters on physics and Benjamin Graham. Rob Wincapaw located books, letters, and articles with unfailing patience. Gitanshu Buch kept track of a multitude of projects while simultaneously running the trading operation.

Bill Egan, John Lamberg, Gaylen Larson, and Adam Robinson reviewed drafts and made many helpful suggestions.

Rip MacKenzie contributed much of the material for the hubris chapter.

James Cramer at TheStreet.com and Jeremy Pink at worldlyinvestor.com encouraged our early writing endeavors.

We are grateful to Steve Stigler and Jim Lorie of the University of Chicago, and to Lee Henkel, Vic’s long-time mentors, and friends. Also to Dan Grossman, Vic’s partner of 30 years, for valued insights and steadfast friendship.

Laurel thanks her music teachers, Aube Tzerko, Bruce Sutherland, and Robert Winter, for teaching an approach to music she has found valuable in all areas of life.

We thank our families for sharing the pain and the pleasure.

VICTOR NIEDERHOFFER LAUREL KENNER

INTRODUCTION

The Hope Snatchers

Look! You fools! You’re in danger! Can’t you see? They’re after you! They’re after all of us! Our wives . . . our children . . . they’re here already! You’re next!

—Dr. Miles Bennell, Invasion of the Body Snatchers (1956 film version)

The nightmare is always the same. I am lying in bed, staring at headlines flashing across a huge monitor installed on my ceiling:

Stocks Fall on Earnings Pessimism Stocks May Fall for Fifth Consecutive Week on Fears Economy Is Sputtering Money Market Yields Fall to 1 Percent as Stock Market Woes Deepen Stocks Fail to Top Y2K High for 450th Consecutive Day Study Shows More Than 60 percent of All Issues Below 52-Week High Markets Plummet as January Barometer Signals Decline for Rest of Year Oracle of Omaha Says Investor Expectations Are “Too High” Market Plunges on Fears Before Fed Meeting Break of Revered Gann Pivot Triggers Massive Selling Dividend Yields Now 25 Percent Below 1996 “Irrational Exuberance” Speech

In my dream, I am long IBM, or priceline.com, or, worst of all, Krung Thai Bank, the state-owned bank in Thailand that fell from $200 to pennies while I held it in 1997. The rest of the dream is always the same. My stock plunges. Massive margin calls are being issued. Related stocks jump off cliffs in sympathy. Delta hedgers are selling more stocks short to rebalance their positions. The naked options I am short are going through the roof. Millions of investors are blindly following the headlines. Listless as zombies, they are liquidating their stocks at any price and piling into money-market funds with an after-tax yield of −1 percent.

“Stop, you fools!” I scream. “There’s no danger! Can’t you see? The headlines are inducing you to lean the wrong way! Unless you get your balance, you’ll lose everything—your wealth, your home!”

The perfect allegory for this state of affairs is found in Invasion of the Body Snatchers, a 1954 sci-fi classic book by Jack Finney.1 Aliens secretly invade the fictional small town of Santa Mira, California, one by one taking over the bodies of unsuspecting residents as they sleep. In the morning, the victims look just the same as they did before, but they no longer have the human emotions of joy, fear, ambition, sorrow, excitement, and hope.

The hero, Dr. Miles Bennell, arriving home after an absence in the midst of the alien takeover, at first dismisses the victims’ strange demeanor. However, he soon realizes that something terrible is happening. Using forensic medicine and nitty-gritty detective work, he and his plucky love interest, Becky Driscoll, figure out that the aliens are parasitic seedpods that replicate themselves in greenhouses so they can take over yet more human victims. Their only aim is to survive by parasitism; they cannot make love or have children, and their gray existence ends after five years.

After a harrowing escape from the town, Miles and Becky set fire to the vanguard of an army of advancing pod people. The rest of the pods conclude that Earth is an inhospitable place, and drift back into space to find new victims.

Often interpreted as a warning against blind obedience to authority, Invasion’s depiction of the victims serves as an extraordinarily apt description of average investors’ vacant, resigned demeanor after the fallacies and propaganda embedded in headlines like the ones in my recurring nightmare have once more led them in the wrong direction.

The overriding problem is that these headlines induce hysteria and then paralysis. They can blind investors to the 1,500,000 percent-a-century return that an investment in the stocks of the United States and most European nations yielded in the twentieth century. On average, the backdrop then seemed every bit as bleak as it does now. As science and enterprise help us live increasingly healthier, more prosperous lives, a century is a highly relevant time frame to contemplate for the children of this book’s readers.

Let’s take another look at the first three headlines:

Stocks Fall on Earnings Pessimism Stocks May Fall for Fifth Consecutive Week on Fears Economy Is Sputtering Money Market Yields Fall to 1 Percent as Stock Market Woes Deepen

These headlines share a common defect: They label conditions that are as We explain in detail later in this book: The phenomena reported in these three headlines are true of any time series with a large random component—such as stock returns. These observations are meaningless to the investor.