The Speculator
By Victor Niederhoffer and Laurel Kenner
The collective common sense of people is astonishing.
Dave Barry
The response to our October 24 column on impostors proved Dave Barry’s point. We received hundreds of letters on cheats, phonies, manipulators, and their techniques and “tells.”
They had a common thread: a promise of something valuable, and a delivery of something (if anything) of much less value.
Alex Castaldo went to the heart of the matter with this post on fashion and accounting:
Some people start out as the honest article, but then
gradually become impostors as they shift their mode of operation while hoping
you won't notice. It is very common in the fashion world. For example, 30 years ago Pierre Cardin was
a great French fashion designer; he personally designed elegant dresses for a
small clientele of wealthy and sophisticated ladies. Gradually he lowered his standards and went down-market while
keeping a haughty and fashionable image.
By now he does not design or manufacture anything but simply sticks his
logo on mass-market products and charges a premium for things that are
completely run-of-the-mill. Many other
fashion houses have done the same; it has become a standard, and winning
strategy.
I think the Big 8 accounting firms of those days also
became impostors. The crusty old
accountant who showed up at audit time and told the CEO with a stern face, “You
cannot capitalize that, you have to expense it,” does not exist any more. The
partners became “client-centered,” meaning they cultivated good relationships
with the CEO in order to win other business such as information technology
project implementation, management consulting, doing the executive's personal
taxes and other projects. Accommodating
the CEO, not upholding standards, was the order of the day. The accountants
still charged the high prices commanded by their reputation, but they no longer
practiced the standards that had allowed their predecessors to acquire that
reputation in the first place. I’m not sure whether it was deliberate (like the
French fashion designer) or a miscalculation.
James Altucher, a partner in Subway Capital, writes that market gurus who use sentiment measures as a contrary indicator belong on our impostors list.
First, a review of the primary
sentiment indicators:
A. The put/call ratio. When this is
greater than 1, supposedly the "dumb money" is bearish and since we
are all the "smart money," IT’S A NEW BULL MARKET!
B. Investors Intelligence survey of
bullish vs. bearish newsletters. When more newsletters are bullish then it’s
bearish and vice versa.
I always get bothered by the guys
who primarily use sentiment indicators. It’s as if there is an exclusive club
where the secret handshake is a shared assumption that everyone who is not in
the club is dumb money. I am not saying we are in a bull or bear market (OK, I
do think the low is in for the year
but then who knows), but I find it interesting that a lot of the financial Web
sites and Web sites written by traders and fund managers are actually fairly
skeptical of the rally because of recent financial sentiment indicators.
For example, there was a big uptick
of the “the bulls” in the latest Investors Intelligence survey. So a lot of
analysts are saying this is a bear market rally until that sentiment gets a lot
lower and many of the big financial Web sites have been recommending shorting
into this rally.
I think, though, that there is a
resource issue. The question is, who is actually fueling this stage of the
“bear market rally”?
A. It’s not the newsletter writers
that are surveyed by II. They make a decent living writing newsletters! Why
flush hard-earned money down the toilet?
B. It’s not the customers of the
newsletter writers. Since the newsletter writers are all “dumb money” the
customers are broke by now.
C. It’s not the mutual funds at this
point. Money is barely trickling in now and mutual funds are standing at 4%
cash, a low for a market bottom. Maybe that's enough to propel the market on
week 1 but probably not week 3.
The bottom line is, all the “smart
money” that’s been going short because of sentiment indicators is now buying in
a huge squeeze. The very people who are advocating selling into this bear rally
are ironically playing an important part of the sentiment process, actually
propelling the market forward enough so that the retail investor gets enough
courage to dip in. It would be interesting to really analyze the effect
sentiment indicators have on different stages in a rally and who the
participants are in each stage. I suspect it would be very revealing and really
underline who is the guru and who is the impostor. But, then again, who knows?
Maybe people should be contrarians toward a post about the sentiment of sites
that use sentiment indicators.
Many readers shared “tells” they use to detect phonies. First place goes to Gordon K. Costley, who wrote:
Based upon my 34 years of law
practice involving business transactions,
I would add one other classic trait
to your “scumbag” list. Anyone who says
"You can trust me on this" should be avoided. However, if he says, “You can trust me
because I am a God-fearing man.” avoid him at all costs as he is definitely
crooked.
Yes, indeed. The nearer to church, the further from god. As the Hungarian saying goes: “The more you claim you're honest, the faster I count my silver.”
Some other impostor phraseology:
calling.” (John Lamberg)
· “As you and I both know…" Content is guaranteed to be marginally true at best or most often outright false. (alte)
· “Between you and me...” Probably not. (Tom Vayda)
We would add to the list:
Mike Ott, a chemist, wrote of his recent experience leasing a car:
The salesman kept telling us how he was working for us against management. They tried to make us pay a security deposit, then waived it after some negotiating. We “saved” $500 by not paying something we shouldn't have had to pay for in the first place.
We liked this one, sent by a reader who asked for anonymity:
My parents were once sold a small supermarket by someone who had almost certainly cooked the accounts, probably by shifting inventory and sales from three similar supermarkets that were thriving, and crediting these sales to the dud he wanted to get rid of. It's impossible to detect this kind of thing from the books and any 'proof' would be difficult to establish. I was about 9 or 10 at the time, and I remember clearly a jovial meeting between my parents and this man at our house. One thing he did was to pat me on the head (showing what a nice guy he was) and although I was just a kid, I didn't trust him at all.
Vince Fulco inveighed against “corporations that cherry-pick the callers who are allowed to ask a question on management’s quarterly/annual conference call to skew the message of the call.” Erving Goffman would have loved that one. He is a social psychologist who wrote in 1959 about theatrical aspects of work in The Presentation of Self in Everyday Life. (Goffman’s observations on solidarity among performers and the arts of impression management make excellent reading for investors.)
Along these lines, some readers noted that over-elaborate performances can be “tells”:
Tom Ryan notes: “One of the key strategies employed by impostors is the use of jargon—specific words adopted and used to fool the audience/client. These keywords or phrases are strung together in vacuous statements to convey the impression of expertise.”
Bonnie Lo, during an internship at a venture capital firm, quickly learned which business plans to reject. “The more font types, the bolder/larger/more underlined the business summary and the prettier (i.e., exponential sales slope) the graphs were, the faster I'd toss them aside. Same with annual reports I read now—too many product ads or awards for reports, and I begin digging around the competition.”
Anybody who responds to a yes-or-no question with a paragraph-long response should be avoided, wrote Tom Vayda.
Fred Crossman advised us to beware of the person who “name-drops incessantly. Knows every important person in your field ‘very well.’ One-ups you every time you mention an event (he went to the better black tie with the Kennedys), restaurant (he knows the maitre d’) or vacation (you went to Florida and he took his clients to Cabo San Lucas). His client list is always star studded.”
We very much liked this ballgame “tell” from Russell Sears, for separating the “image is everything” people from humble, trustworthy types. “One will put down the hot dog vendor’s weight, nationality, style--demean them behind their back. A humble guy may ask the vendor questions about how good his sales are, what he likes selling best—uplift him.”
In land deals, writes developer/investor Duncan Coker, buyers can easily become distracted by legal jargon and endless small details. “The buyer gets preoccupied arguing over a small easement. After the closing, he finds out his boundary line was wrongly surveyed.”
Coker says he always enjoys watching the three-card monte games on Lower Broadway in Manhattan. “Those guys are good. The bent cards, gambling by confederates and overall false excitement tends to draw one in. My honest, non-gambling out-of-town friend lost $20 bucks in the blink of an eye while my back was turned. The game shut down and all that was left was a brown folded box on a sidewalk.”
The markets and their interpreters provide a never-ending source of deception, theater and fraud. Trader Ryan Carlson writes:
Market makers are great at putting
out up/down ticks to make people nervous, perhaps set off stops and generally
deceive people into believing that volume is being traded at a certain price.
In the pit where you can only know
the current bid/offer size, a common tactic is while working a sell order, to
bid on huge size which will often spook others into believing buying pressure
is entering the market and in turn they'll buy your offer, and vice versa. This
is more effective on certain bourses such as the Singapore Exchange where the
pit locals are legally allowed to watch orders flashed into the pit from the
desk and trade ahead of them, a license to steal basically.
Electronic trading allows for a
greater number of impostors since people can do it anonymously rather than in
the pit where such conduct would damage their reputation. Bogus size that most people "lean on"
can be seen above and below the market in the order book (at least on Globex),
and many traders abuse this to the fullest possible extent. However, it can be
countered by only displaying, for instance, a bid on 10 contracts when the full
order is 200.
By the sea
Proximity to water is always good tell for fraud; think of San Diego and Newport Beach, Calif.; Fort Lauderdale and Boca Raton, Fla.; and, yes, Coney Island, N.Y. In Atlantic City, Vic’s friend Murray Raphel successfully managed three consecutive mayoral campaigns, and each mayor independently wound up in jail. A reader who for many years lived in Vancouver, British Columbia, observed many impostor types in the coastal city’s famed penny stock market:
Flashy, always with a hot babe, and
basically can size anyone up in less the 10 seconds, in estimating how much
they can be taken for. When the NASDAQ was turned into a venture exchange, it
attracted many of these same types.
Things to watch out for:
1. “Bounce accounts” are used in
stock buy-backs, insider buys, and to eliminate funds from being attached in
lawsuits. For example: An insider buys his own stock, as a means of pumping the
market. The money goes into the company’s bounce account and is later expensed
out as an overdue lease payment on equipment, or an overdue salary expense,
into an account that just happens to be his personal bank account.
2. Always beware of a company
that has large lease agreements with the insiders.
Kate Donnelly Schneider had two brilliant additions to the four impostor characteristics that trader David Rosen wrote about in our column last week (unrelentingly trendy, always on the make, unwilling to discuss risk, your instant “best friend”).
5) A toxic person/con
artist/impostor also has a history of failed relationships, of which he/she is
the innocent victim. Their “friends” are only new acquaintances; the test of
time has stripped their veneer. First wives were “nuts” and turned the children
against them, so there's no contact with them. The family of origin is dead
(probably not true) or did some dastardly deed to the impostor (usually around
money) that led to estrangement. Prior business associates “screwed “ them,
thus no contact with them.
6) There's another kind of
impostor—the Genetic Impostor—a bit harder to discern. He or she is in a bunch
of deals with Daddy. He wants to do business or get close to you—but only to
see what you can do for this two-headed monolith. He's very interested in your
success, and interested in you being impressed by him—but his “story” doesn't
quite add up. He has no real success of his own, only what has been fed to him
by Daddy, and Daddy has sent him out in search of fresh blood. He seems to have
sprung directly from the loins of Daddy/Predator #1. You possess the life force
on which they exist, so his purpose is to take all you have to benefit their
common good. You are a means of survival for them.
One reader who admitted to losing thousands of dollars by investing with impostors concluded:
They are more interested in
the challenge of convincing you of their honesty and the value of their
proposals and projects than they are in having a successful operation. If they
would have only dealt with the project at hand and applied their skills to it
rather than to you they would have been very successful. It is too bad that
such intelligence and hard work is done for the sole purpose of deception and
fraud.
Our revered market shrink, Dr. Brett Steenbarger, notes that deceit often begins with self-deception:
An impostor is one who must deny reality to maintain a false sense of self. Flip sides of the same coin are those who cannot accept criticism and those who cannot accept praise; those who cannot accept a loss, and those who cannot tolerate a gain. Most traders are more willing to discuss their psychological problems than their trading shortcomings, not because they fear revealing proprietary information, but because they fear revealing that they have nothing proprietary to share. Researchers at the London Business School found that traders who felt most confident in their ability to predict outcomes in a random task had the worst trading outcomes. They termed this phenomenon "illusion of control," and I suspect it's the psychological basis for many a trading impostor.
Dr.
Brett’s book, The Psychology of Trading,
will be out soon. We had a preview, and everybody should read it.
Dennis Futchik was amused by our classification attempts, but thought we were missing the main point: Imposture is a personality defect and such is one of the myriad symptoms of a bad upbringing (or, as he put it, “bad code programmed into young computers (minds) by bad programmers of varying skill levels in the nuclear family”). It is in the family that people learn to become excuse experts or self-loathers, he writes. The worst part of it is that “kids who never escape the emotional gravity of the undifferentiated family ego mass grow up to raise kids who are as emotionally stuck to Mom and Dad as M and D were to Grandma and Grandpa.”
Debashis Basu asked us to consider the institutional communists, from Mao to Mugabe, for our list of big impostors.
These have impoverished more than
half the world (by land mass, much more by population) over almost a century --
precisely when the other half was creating and distributing wealth unprecedented
in human history through a different economic system.
Those who have suffered will vividly
remember that the communist system of tyranny, oppression, exploitation was
carried out “in the name of the people.” It was always People’s Liberation
Army, Democratic People's Republic. But it was never democratic, never for the
people, always for a small coterie of leaders who imposed themselves through
manipulation and murder. Their merciless exploitation was inflicted
unremittingly on billions on a national and international scale for decades,
and still continues in North Korea and parts of Africa. None of the examples
given in the list can match the above in sheer scale, either in time or scope.
Jack Tierney, a Tennessee philosopher who spent many years in newspapers, came up with a phrase tell that could be applied directly to the stock market. Anybody who comes up with a way to test this concept will win an official Speculator cane:
A good number of years ago the
gentleman who first hired me was suddenly replaced by a “young Turk" who
was obviously on a career path to the top. The newcomer's knowledge and
interest in our functions was superficial at best; my former boss' life had
been spent in the creative end of advertising so, following generally accepted
business practices, he was made Assistant Purchasing Manager. In his farewell
address to us he stated that he was “excited about his new position.” The word
“excited” struck me as so inappropriate and inaccurate, and its dissonance has
never left me.
Yet in the years that followed, I've discovered it has become the accepted way of spinning a disastrous occurrence. Whenever I hear an executive say that he's excited about recent negative developments, it's time to walk away from that stock...chances are he is neither excited nor optimistic. Following are four examples (out of 15,600) grabbed from Google to underscore this:
(Note from the Specs: We have added the performance of each stock vs. the S&P 500 beneath Tierney’s quotes)
May 28, 2002: Global Crossing Intends to Propose Company-Sponsored Restructuring Plan To Creditors. Mr. Legere said: “While we are approaching the future and our forecasts pragmatically, we are as passionate about our business, our network and the value we bring to customers as we ever were. We believe investors recognize this and ARE EXCITED about participating in this next chapter of industry growth."
(GLBXQ -73%; S&P 500 –16%)
Jan. 17, 2000: Bell & Howell Co. has announced that it plans a major
restructuring that will split the company into two new companies...James P.
Roemer, Bell & Howell chairman, president, and CEO, said: "WE'RE EXTREMELY
EXCITED about these very positive steps for Bell & Howell.
(PQE –41%; S&P 500 –21%)
July 19, 2001: Network Commerce Announces Successes in Financial Restructuring. Dwayne Walker, Chairman and Chief Executive Officer, stated, "While we still face challenges, we are proud of the progress we have made on our business and financial restructuring efforts. WE ARE VERY EXCITED about the potential synergies from further integration of our remaining core businesses.”
(NWKC –94%; S&P 500 –35%)
Feb. 20, 1997: Glenn Fitchet, President and Chief Executive Officer of Vodavi, stated, "While we are disappointed and frustrated by the events leading up to our decision to take the restructuring charges associated with Enhanced, we firmly believe that this decision is correct and will prove to be in the best interests of our stockholders. Fitchet added "The management changes at Enhanced have already proven to be beneficial. The combination of the strong core operations and the recent changes at Enhanced HAVE US EXCITED about the future potential of the business."
(VTEK –2%; S&P 500 +42%)
Dave Barry is one of the funniest people we’ve ever read. In a recent interview, he said something that struck a chord with us: “I write under the assumptions—and I’ve read enough mail to know this is true—that however smart and funny I think I am, there are a lot of people who are a lot smarter and a lot funnier. That’s not false modesty. It’s the absolute truth. It’s what motivates me to keep trying to write smarter.”
We, too, have learned that our readers are much smarter than we are. We figure the best we can do is to make our column a place where ideas are exchanged. After all, that’s how humans learned to progress beyond the tribe, to include outsiders and to live better lives. In his great 1988 manifesto of capitalism, The Fatal Conceit, the University of Chicago’s F.A. Hayek in The Fatal Conceit described the market as “an information-gathering process, able to call up, and to put to use, widely dispersed information that no central planning agency, let alone any individual, could know as a whole, possess or control….
The efforts of millions of individuals in different situations, with different possessions and desires, having access to different information about means, knowing little or nothing about one another’s particular needs, and aiming at different scales of ends, are coordinated by means of exchange systems. A continuous flow of goods and services is created that, for a remarkably high number of the participating individuals, fulfils their guiding expectations and values.”
As Thanksgiving approaches, we are in a thankful mood, having lived through a year filled with difficulties of all sorts and come out strong. We’re particularly grateful for all the wisdom that readers have shared with us—it has fulfilled our expectations many times over.
Victor Niederhoffer
Laurel Kenner
October 28, 2002