Daily Speculations The Web Site of  Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.

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Nobody Asked Me, But...

The book Chance in Biology, using probability theory to explore nature, is one of the finest
books on chance, and has excellent chapters using Venn diagrams to motivate probability,  random walks,  chaos, statistics of extreme, noise and perception, patterns of disorder. All are illustrated with biological examples and there is new and enlightening material for new and  experienced scholars as well as for those with interest in investments.

The book Statistical Rules of Thumb, by Gerald Belle, is similarly graspable by all, and expands one's horizons in many directions. A very nice discussion of  waiting times related to occurrences of spontaneous rare events, modeled by Poisson, is good there also.

The moves at the beginning of the month would seem to be designed to throw the amateur off the track so that he will make his contribution to the frictional upkeep the rest of the month -but this must be tested and generalized.

The  end of 2003 price for most commodities seems like a good pivot point to evolve a  swing system from but this must be tested. -- Vic

03/08/2004

In a biography of Simon Newcomb that Stigler published in American Contribution to Mathematical Statistics in the Nineteenth Century, vol. 2, Newcomb  relates a good method of picking a wife:  Combe had suggested that at age 25 a wife should be found and she should be an economical housekeeper. There was no one in Wallace who satisfied that requirement. So he set out in the then-Arcadian simplicity of travelers to find one. Wherever he stopped he made a critical investigation of the housekeeping, perhaps rising before the family for this purpose. One young woman spoiled any possible chance she might have had by a lack of economy in the making of bread. She was asked what she did with an unnecessarily large remnant of dough left sticking to the sides of the pan. She replied that she fed it to the horses. Her case received no further consideration. I am wondering if we might apply that method to the selection of  companies for investment. Could we look at the salaries of the chief executives relative to market value as such a measure. One would have to exclude the Sage of the Midwest from the ranks as he used second level thinking to boast about his low salary and high taxes paid to offset previous transgressions in my opinion. But it would make a good study.-- Victor Niederhoffer

The studies of deletions and additions to indexes have always appeared to me woefully deficient, often making the mistake of using some very low-priced issues that one couldn’t have reasonably bought in any quantity and that are totally infinitely variable to prove the ephemeral point as so many studies of this nature do . However, what has always seemed to  me worthwhile is to predict which companies will be added and deleted to the S&P 500 in advance and take account of that 20 percentage point-or-so edge before the system-mongers get at them. Some preliminary results by my very good friends the Volpes has convinced me that such an undertaking would be quite fruitful. -- Victor Niederhoffer

My daughter Katie, a former hockey goalie at Williams, queries me as to whether the inspiring movie “Miracle” has an accurate rendition of the goalie's play. She says he appears to have played too much of a vertical game. If any of our readers have expertise in this, as they do in most subjects, may I prevail on you to educate me directly. At the same time, if you know of anyone who would benefit from an e-mail discussion of a natural philosophic nature, who can override the bait-and-switch battles constantly engendered by religion and collectivism and the bearish nature of recent economic releases, please recommend them so we can at same time improve our expertise for important questions like these. -- Victor Niederhoffer

01/27/2004

Let us recall that the entire subject of statistical properties of stock prices, which led to random walks and efficient markets, started out with the studies of streaks (they're called runs and reversals) by Jones, Cowles and Davis, and that after the always amateurish and misguided work of a certain University of Chicago professor given to stereotypical results and outdated data, the subject has been considered often by others and written about with respect to individual stocks and markets,  sometimes with great style on the site that the marqueeist Jubak writes upon, and that the methodologies of streak-based trading are followed by billions and billions of dollars overseen by quasi-scientific second-handers. A preliminary to considering streaks is to consider expectations after runs and breaks of run of varying lengths. And the work of Davis in the Analysis of Economic Time Series was a good start in that direction. As for streaks in racket sports...well, that's another story.

The difference between short-term and long-term results is key to economics and the market. It's easy to see what happens, for example, to payments to landlords when a price ceiling is set, but not so easy to see what sexual favors and non-price discrimination and key money will evolve, or what the long-run effects on the supply and maintenance of housing will be. Same for when we impose a tariff to save jobs of steel workers or other manufacturers -- what happens to the other jobs lost by higher prices that consumers pay, and lack of export from other entities?

This subject is well covered in "The Indirect Effects of Economic Actions," the last chapter of Heyne's classic text on economics. But not covered are comparable points about stock market results. When a company gains a temporary advantage by some lucky factor,  we often see this capitalized in the price. Gains from fads, toys, movies, hedging, trading, new methods of achieving speed come to mind. Also the bad results due to bad luck. How often do we drive a stock down when it's doing the good things for the long run but suffers in the short term?

The phenomenon of the regression bias and the mix of luck and skill in all results covered in Steve Stigler's efforts gives insight and potential profit here. Victor Niederhoffer

10/13/2003

...The mid-October moves in bunds, the biggest market in the world ... I could write a sonnet about them. and all the specs in the world could learn an infinity from them, and also an abject lesson in cane investing.

Date  Open   High    Lo      Close  Vol ( mil)
1017 11220 11270 11175 11253 1.2
1016 11247 11290 11222 11231 1.0
1015 11284 11288 11235 11249 1.1
1014 11279 11310 11263 11294 0.8
1013 11341 11343 11281 11297 0.5
1010 11316 11369 11299 11354 0.7

...A passage in The Surgeon's Mate is vintage Patrick O'Brian, describing one of 20 subjects he's on top of, and showing why his readers consider his depth unrivaled in such fields as medicine, nature, food, nautical lore, and now finance. Maturin talking: "If we just knew the whereabouts of the French your money troubles would be over. You wouldn't be discounting bills and you'd be able to marry Sophie. A little speculation in rice would do the trick. Bombay can't feed itself. and if the French are near, no rice will come in and the price will explode. ... or one could just augment the moves in the funds with a little info about the recent fortunes of Napoleon."

...The songs of Yip Harberg, including "Over the Rainbow" and "Brother Can You Spare a Dime" are like the prose of Jack Finney or Rabelais or Cervantes in that they represent a positive view of the frailty, the humor and the greatness of humanity and the nobility of its pursuit.

...Is there a better way to classify stocks into groups than by industry? Correlations between price movements of Nasdaq stocks as opposed to S&P 500 stocks might be greater than the correlation between industries.

...What is it that keeps Sam Eisenstadt and others like him so young, as compared to old people like Buffett and Welch? A book on animal behavior talks about all the studies that show that the size of offspring in lion and antelope
group is all highly correlated with degree of prior social status.

...Will it be possible to short the Rydex hedge fund index? With the high fees that hedge fund managers take out, one must take off the top 8 percentage points for fees, another few points for trading costs, and another few points for disguised sales fees. Put it all together and it comes to at least 20% off the top for the average hedge fund, which to the extent that they are not long only would lead to down 60% over a four-year period. What a great opportunity for someone.

...The long waiting times for a few rises in a row from mid-2000 to present, and then the comparable absence of a few declines in a row during mid-20002, are cause for great feelings of non-randomness.

...What is the evidence that prices don't follow a normal distribution? There are a few two many large declines? But considering the number of hypotheses considered, and the wandering nature of the volatility, the expected number of large declines in the future would not seem significantly different from normal.