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Spec Forum: Predator and Prey

V.F.: Can anyone recommend a resource or primer on predator-prey models? The last few days, I've been following the action on Career Education (CECO). I
haven't been keeping up on every minute to minute corporate development but essentially the second of two lawsuits came to light calling into question the company's recruiting methods. Essentially the stock has fallen from the mid 50s to high 30s under very high volume.

While watching the action, it struck me that, in a simplified world, the long owners of the stock are like zebras or gazelles in the wild (prey). They go about their business moving in herds and lazily grazing away on the grasses (trading/investing ideas). Maybe even getting a little complacent. In equity terms, "the stock has been 'working' for a while so we'll stick with it". The predator, perhaps a lion, can take the form of any catalyst which will drive the long owners into a frenzy/panic/confusion so that they forget their grazing activities and move into self preservation mode...that is, flee the grazelands. In the case of CECO, puking the stock down to the mid $30s. I'm not so interested in capturing the initial catalyst as much as I am interested in what criteria may cause the prey to re-group and herd again...With my fundamental cap on, finding grazers in a stock after such an event would be a function of price and/or time and comfort in the issues which originally caused the stampede away from the story in the first place. Wondering out loud as to the parallels with the natural world...

I realize this idea has some basic similarity to the Chair's concepts of the elephants thundering to and fro in the bush. Additionally, I am overstepping my bounds of fundamental analysis to see if the theory is a common one. If this is considered more rambling than contributory, let me know and I'll slink back into the weeds.

Art Cooper: The obvious place to start is with a google search of the Lotka-Volterra predator-prey equation and model.

Big Al: If you posit your prey as "longs", and your predators as "events", then predator-prey models don't really apply. Predator-prey equations like Lotka-Volterra are meant to model populations which have an effect *on each other*, e.g., wolves eat rabbits, but the fewer rabbits there are, the fewer wolves there can be, so the rabbits limit the wolves -- predator-prey models are
simultaneous differential equations that show the effect of each population on the other. If your "predators" are exogenous events, then you wouldn't have the same relationship.

You might find something more interesting by having prey=longs and predators=shorts. (No offense intended, nor any kow-towing to short-bashers.) This long/short model at least might provoke some interesting thinking about the relationship between longs and shorts in the market.

Art Cooper: My basic assumption is that the great mass of longs ARE prey. See the discussion of the market's food chain in EdSpec.

C.L.: All usual disclaimers apply as to validity or spuriousness of email.

My perspective on the predator-prey analogy in the equity market is that the prey is actually the company itself. An external source of aggression, be
they shorts, regulators, media (i.e. the predator) attacks the company. The predator is not per se attacking the investors who are long, and neither do
the latter have a volitional capacity to thwart the predator's charges/accusations.

Thus, the company under attack is the prey itself. The steps it takes, i.e. its defences, are cogent to how it survives the attack.

There are two types of defences: primary and secondary.

Primary defenses: These operate even if the prey has not detected the predator. They decrease the chances that the prey will be detected or encountered. If detected, they reduce the chances of attack by the predator. Broadly the defenses are Avoidance, Camouflage and Patterns. Simply put, if you follow SEC rules/guidelines, follow the norms for the rest of the industry (for the most part), you are quite safe.

Secondary defenses: These are called into question when the prey is under active pursuit. Predatory activity towards a company is primarily a function
of how information is framed and/or manipulated against the company by external entities (the predators).

Consequently, secondary defenses relate to how the company effectively chooses and uses its communication efforts to thwart the predatory activities. To the extent that the company manages to shape perception more cogently, rationally and effectively than the predatory actions, the company survives the predatory assault.

Thus, secondary defenses in biology include: Movement away from the Predator; Pursuit-Deterrent Signals (Communication to predator that the prey is too fast to catch); Symbiotic Relationships (Get some other entity involved); Chemical Defenses (Counter law-suit); Mimicry (Sound and Fury); Distraction Displays; Death-Feigning Displays (We are broke, don t bother);
Startle Displays (Change topic/framing) Social Defenses (Public opinion)

Thus, investor opinion, media reports are the battlefields on which this war is waged.

Here is a specific example: When Ahold was having difficulties some time ago (i.e. it was a prey), a speaker in an investment management class stated that he had never seen such a good PR campaign in his life (i.e. it had put on great defenses and that the defenses were working), and that on that basis alone, Ahold would definitely survive and was definitely a buy .

This is not a field of quantitative analysis. This is a qualitative information analysis exercise. This involves a subjective opinion as to the communication and Public Relations efforts of the company, and how it is succeeding, per unit of time. This is a dynamic thing issue because at the same time, the Predator is attacking through other (informational) charges
through different channels. Finally, while the process of how the communication efforts are proceeding can be most easily discerned, the timing, and sequencing of the choices made are most important.

Rob Wincapaw:

Here are a couple of titles:
"Predator-Prey Relationshps" by Feder and Lauder..University of chicago
1986.

"Population Biology, Concepts and Models" Alan Hastings, Springer. 1997.

"Animal Behaviour, Ecology and Evolution" C.J. Barnard, Croom Helm 1983.

V.F.: I'm not so interested in capturing the initial catalyst as much as I am interested in what criteria may cause the prey to re-group and herd
again...With my fundamental cap on, finding grazers in a stock after such an event would be a function of price and/or time and comfort in the issues
which originally caused the stampede away from the story in the first place.

Fred Crossman: Regrouping is caused by bullish analyst reports at those firms which now hold the stock and did not sell (search "institutional ownership"). As Vic
and Susan learned in Africa, the wildebeest that surrounds the watering hole run from the pond when an alligator or female lion grabs one and kills it.
the herd scatters. The memory of the wildebeest is measured in minutes. It soon returns to water and graze, not remembering why it just stampeded away.
then you can short CECO.

K.S.B.: An interesting book on the topic:

Evolutionary Wars A Three Billion Year Arms Race The Battle of Species on Land, at Sea and in the Air, Charles Kingsley Levy 1999 W.H.Freeman
& Co.

The book concentrates on active strategies used for attack and counterattack/ survival in the natural world, similar to details that have been
summarized by Mr. Chun Lim in his post. I had read the book (curious about the Chair s ideas on the subject) to be acquainted with, among other things,
the survival strategies of herbivores, which cannot counter-attack and found that the two most common are:

1. Gigantism which is an evolutionary dead-end. (Only for a large fund, I suppose)
2. Escape with extreme velocity. (Get out fast, which makes sense to small fry like me)

However, V.F.'s basic query what criteria may cause the prey to re-group is not addressed in the book.

In a way, the loss of an individual or a small number of individuals does not matter to the survival of the herd as a whole and Mr Crossman s comment : it soon returns to water and graze, not remembering why it just stampeded away . essentially states that in returning to the same watering hole or grazing spot, the herd must be finding some survival value and therefore the memory of the predator and loss of an individual is not conditioned by evolution into the instincts of the species as a survival threat.

This comment started me thinking, imagining as an analogy:

1. The herd -The stake
2. The predator - They
3. Survival response - Get out fast
4. One member of the herd is devoured - A small loss
5. Drink again - Trade again ( .with an edge)
6. Same watering hole - The same market (what me worry)

Russell D Sears: On Influence and Prey.

It occurred to me that one of the reasons investors allows the unjustified influence of the pessimist is that they consider themselves prey, instead of predator. Perhaps, many investors are prey. They need to stay in the herd. The pessimist remind them what could happen if they stray.

Asking the right question:

We as speculators, think all other investors are asking the same question, "how to make the best return?"

The pension fund manager is first asking, a prey question. How would I personally get killed? What would happen to me if leave the herd, and fall behind?. Regulators, lawsuits and personal liability. I would suggest that the belief in the efficient market theory does not drive indexing, So much as pension plans index, because it is so hard to disprove the efficient market theory therefore supplies a good hiding place.

And similarly the fund manager asks, "how do I keep from getting fired?" The answer, is of course not to be the slowest in the herd, or the quickest either.

TA's evidence only being good in hindsight:

From a predator's prospective this is damning enough to reject it, since it does not help raise returns. However, I would suggest from a pension plan and fund manager, a preys prospective, this is a hearty recommendation. For they will only be judged in hindsight. He imagines what would happen to him while he is standing trial, either literally in court, or in his
bosses office and is shown a clear TA formations. While it may be after the fact, this will hold little muster with the jury, who will be shown something even they can understand, and will have expert TA's testifying to its wide acceptance and validity.

How many times have you heard recently a TA say, "I would have got you out of Enron, WorldCom, QQQ etc, at X"? The prey understands this to mean, "I could save your job". Not, "this system will get you better returns."

As the horse bettor says, "embrace losses:"

It appears the predator can get an edge over they prey, by not fearing losses, but by taking advantage of the herd.

Counting evidence presented already:

Jon Markman's and the drops versus adds to the S&P index.

The high VIX as a signal to buy.

Vic's comment yesterday on S&P crossing the 10-day moving average.

All of these show a tendency to be overbought or oversold, due to the fear
of leaving the herd and becoming prey.

Counting to be done:

My hypothesis is that in times of crisis and panic many revert to tea leaves and TA. Further, TA gains converts after the market crash. My TA knowledge is slim, do any of you have a good way to count this and insights to profits? This is my theory of, as Mr. e put it, "when to use TA", against the prey.

Now how to count it?