Sunday, June 8, 2003
While mainstream U.S. media continue to ignore Practical Speculation, we received word that the book is receiving quite a lot of attention in Europe. The following articles from The Sunday Telegraph, Financial Times and the Dutch paper De Morgen were kindly sent to us by Paul Marsh, Esmee Fairbairn Professor of Finance at London Business School, and one of the three authors of Triumph of the Optimists, the best investment book of all time.
City - Comment - Tall storeys before a fall Self-promoting chief executives and
swanky skyscrapers ...
By DAMIAN REECE.
8 June 2003
The Sunday Telegraph
(C) 2003 Telegraph Group Limited, London
City - Comment - Tall storeys before a fall Self-promoting chief executives and
swanky skyscrapers usually signal disaster ahead. Damian Reece reports.
The jealous gods that rule the world's stock markets are once again punishing
those mortals who thought they could fly higher than the rest.
Martha Stewart, the US lifestyle guru who introduced millions of Americans to
the long-forgotten joys of baking cookies and decorating the porch, last week
stood down as chairman and chief executive of her eponymous business empire in
the face of a grand jury indictment for securities fraud.
For a woman who once told Oprah Winfrey that her mental strength was such that
"I can almost bend steel with my mind, I can bend anything if I try hard
enough", her fall from grace is one of the most spectacular in an age
characterised by once untouchable company bosses meeting their nemesis.
But how do investors spot the hero who is about to become a zero before it's too
late? A new book has come up with a string of indicators for investors keen to
spot the next corporate Icarus. From executive boasting to the size of your
skyscraper, Victor Niederhoffer and Laurel Kenner have identified the warning
signs of corporate ego trips*.
The noisier the bragging, the swankier the headquarters or the more grandiose
the sponsorship, the more likely a company will crash and burn, they say. Enron,
WorldCom and Tyco were all wonder stocks that have plummeted to earth. All had
one thing in common: a chief executive with a first-class degree in bragging,
albeit often to a sycophantic audience.
Niederhoffer and Kenner have identified a string of outlandish boasts made by
companies and analysed their subsequent share price performance. Take Gateway,
the former high-flying maker of personal computers. In March 1999 it said:
"Gateway's goal is to become number one on the web, not because we are the
biggest but because we are the best." By the beginning of this year, its shares
had fallen 80 per cent.
More notorious was Enron's braggadocio. On December 31 1999 it unfurled a new
banner on its corporate HQ which read "From the world's leading energy company
... to the world's leading company!". The fate that actually lay in store was a
98 per cent collapse in its share price.
And then there is Delta Airlines. In explaining why its internet-in-the-sky
venture would work, it said on June 14 2001: "We are the best in the business."
The shares subsequently underperformed the S&P 500 by 25 per cent.
Meanwhile, Martha Stewart made her mind-bending remark in July 2001. Her
subsequent woes, and those of her company, Martha Stewart Living Omnimedia, are
now the stuff of financial soap opera.
Why is the claim to be number one so poisonous? Partly because it is redolent of
a management that is losing its grip on harsh commercial reality - or of a CEO
so powerful that none of his colleagues dare bring him or her down to earth.
"When you have become successful and you've got so much money to spread around a
number of advisers, there are plenty of people willing to tell you what you want
to hear," says Terry Smith, the chief executive of Collins Stewart, the
stockbroker, and a Sunday Telegraph columnist.
Smith's favourite tale of corporate hubris in the UK is Spring Ram, the bathroom
fittings business, whose chairman, Bill Rooney, boasted of 25 per cent profit
growth in 1992 despite the fierce recession of the early 1990s. He would joke
with analysts that the secret of the company's prodigious growth was his magic
jelly beans. A false accounting scandal in 1993 revealed Rooney's jokes to be
decidedly unfunny. The company, once valued at à650m, was eventually sold in
1999 for à81.7m.
However, bragging in words is probably less hubristic than showing off by
constructing or occupying some vast and glamorous office block. Thus, in the UK,
the Lloyd's of London building, designed by the celebrity architect Lord Rogers,
was completed in 1986. This shortly before the insurance market's near collapse,
a crisis which plunged thousands of members, or Names, into penury.
And National Westminster Bank built a 42-storey skyscraper in the heart of the
City in the 1970s as evidence of its banking dominance. But after years of
lacklustre, complacent performance, it is now simply a brand owned by the Royal
Bank of Scotland.
So Niederhoffer and Kenner have also tracked the share prices of companies that
have flaunted a "world's tallest building" over the past 100 years.
On average, those large public companies with skyscrapers named after them have
underperformed the market in the three years after completion by 9 per cent in
year one, 19 per cent in year two and 22 per cent in year three.
The exception to this rule is Chrysler, whose share price fell 29 per cent and
43 per cent in the first and second years after its art deco masterpiece was
completed in New York in 1930. In fact, that was a better performance than the
Dow Jones Industrial Average, which fell 53 per cent and 64 per cent
respectively. The following year, Chrysler's shares rose 1 per cent while the
Dow fell 39 per cent.
However, the completion of the Sears Tower in 1974 saw the department store's
share price woefully underperform the market. There was a similar fate for
Commerzbank, whose headquarters building was completed in 1997. Its share price
fell in the three years after topping out by 21 per cent, 11 per cent and 29 per
cent respectively, when the stock market was booming.
"As we write in 2002," the writers say, "the new `tallest' building, the
Shanghai World Financial Centre, is under construction in China. Even higher
towers are proposed for India and New York. Investors should beware."
Nearing completion in the City of London is the "Erotic Gherkin", Swiss Re's 590
ft contribution to modern architecture designed by Lord Foster with 40 floors
and 500,000 sq ft of office space.
The insurer has avoided christening its skyscraper with its own name, for which
its shareholders should be profoundly grateful.
*Practical Speculation is published by John Wiley & Sons. à20.95p.
Technically, these methods don't work.
By PHILIP COGGAN.
7 June 2003
(c) 2003 Financial Times Limited. All Rights Reserved
It happens every couple of weeks. A letter arrives in my in-tray from someone,
somewhere who has the answer.
It may be that the Dow is heading to an all-time low. It may be that gold is
heading to $1,000 an ounce. But one thing is certain; it will contain some kind
of chart, brightly coloured and covered with wiggly lines and arrows.
I have tried to keep an open mind about technical analysis. For some time, I
regaled readers with news of the Coppock indicator, a technical measure that had
the virtues of infrequent signals and a solid record.
But I should have stuck to my natural cynicism. The Coppock indicator has
signalled twice, during this bear market, that the FTSE 100 index was a buy.
Each signal proved dead wrong.
My view is now rather jaundiced. At best, technical analysts state the obvious;
when the market's going up, they tell you it's going up; when it's falling, they
tell you it's coming down. At worst, they generate a host of signals that cost
small investors money through excessive trading costs.
It is true that highly intelligent people (including esteemed FT colleagues)
believe in the stuff. And it is not, in principle, impossible that, at the core
of technical analysis, there is some truth yet to be discovered.
If one accepts that equity markets are not completely efficient and that
investors can be biased, it is possible that the study of past price movements
may be worthwhile.
For example, academic studies show that, in the short term, price momentum
appears to persist. Successful fund managers, such as Hugh Hendry of Odey Asset
Management, use momentum as a check for their fundamental views; if the story is
good, but the price is going down, there is probably something wrong with the
story. But it is a big stretch from such analysis to the argument that all price
movements follow a set pattern, or series of patterns.
As it happens, Victor Niederhoffer and Laurel Kenner, the authors of a new
book*, have examined a host of different technical indicators, including head
and shoulders patterns and Japanese candlestick measures such as "three black
crows". None has passed the test of statistical significance; in other words,
investors could not rely on them to provide signals to buy, or sell, stocks.
Indeed, there is even a Federal Reserve paper on the issue of "head and
shoulders" patterns. Its author, Carol Osler, tested the patterns over 31 years
and found that trading in individual equities based on such patterns is, on
As Niederhoffer and Kenner write:
"The problem with technical analysis is that practitioners and advocates fail to
follow standard scientific procedure in presenting and evaluating its
techniques. Technical analysis is so rife with subjective interpretations that
it must be regarded as more of a religion than a method, complete with priests
who bewilder the unwashed at high-priced seminars."
One has to be even more suspicious of claims that financial markets move in long
and short term patterns that can be found in nature. Take Elliott wave theory,
which says that markets move in patterns of five and three - an up phase (itself
consisting of three ups and two downs) and a down phase (comprising two downs
and an up).
Believers in Elliott wave theory argue that this is a "fractal" pattern in which
a small part replicates the whole. So Elliott waves can be found within a day's
trading period and on a scale that spans centuries. Hence the belief in the
"long wave" or "grand supercycle" that can be traced all the way back to the
The problem with such an ambitious theory is that it is completely unprovable.
Financial data of the most rudimentary kind only date back around 300 years. So
if there is a grand supercycle lasting centuries, we can only record one of
them. And to date, the current bear market hardly demonstrates "grand
supercycle" strength - most indices dropped to six-year lows, not 60-year
Economic students might recall the "Kondratieff wave" that appeared to indicate
a cycle of 54-56 years, after peaks in 1819, 1873 and 1929. When the 1987 crash
came, some were quick to announce that Kondratieff had returned. But 1987 proved
to be a blip.
Maybe 2000 will turn out to be the latest Kondratieff peak, although the
economic downturn to date is nothing like as bad as the previous examples. But
if the "regular" cycle has now extended to 71 years, maybe it's not that regular
and maybe it's no more useful than saying "economic dislocations occur from time
to time but we can't tell when".
It is human nature to look for patterns. Sometimes it can be useful; if dark
clouds are above, it is likely to rain. But often we 'see' patterns that are not
there, we can be "fooled by randomness" to cite the excellent book of Nassim
Indeed, as people react to the patterns they perceive, their behaviour can
change. Alas, that means there is no "answer" - no universal law that can be
divined from lines on a graph. Life is simply not that easy.
Financial markets can also be affected by one-off events, such as September 11,
that can totally alter investor attitudes. And if you believe that such events
can be predicted by studying lines on a graph - there's a bridge in Brooklyn I'd
like to sell you. *Practical Speculation by Victor Niederhoffer and Laurel
Kenner, published by John Wiley & Sons, 388pp, à20.95 **Fooled by Randomness,
published by Texere, 204pp, à18.99 email@example.com
Lords on the board - PHILIP COGGAN LOMBARD.
By PHILIP COGGAN.
3 June 2003
(c) 2003 Financial Times Limited. All Rights Reserved
At last, some modest proof of what some of us have long suspected - beware of
lords on boards. Authors Victor Niederhoffer and Laurel Kenner* studied the
relationship between stock returns and the number of board members with titles
in the 50 largest companies by market value in the FTSE 100. Over a five year
period, the more titles on the board, the worse the performance of the shares.
Niederhoffer and Kenner even invented a valuation indicator, the earnings/lords
ratio, dividing the earnings per share by the number of titles in the boardroom.
At the time they did the study, Powergen, with just one lord, looked the most
attractive stock on this basis.
The finding raises the obvious question of causality. As the authors write: "Was
it the lords who caused the lacklustre performance or the lacklustre performance
that prompted the companies to use lords as window-dressing?"
That comment, however, suggests a possible American misunderstanding of the
British honours system. The presence of titles on UK boards does not simply
indicate the lingering influence of the ancient British aristocracy. Charities
may still want to recruit Lord Ponsonby-Snodgrass just to make the notepaper
look respectable; boards of FTSE 100 companies don't really need to do so.
Instead, the preponderance of titles shows the tendency for the honours system
to reward people for business success. Rise to the top of a FTSE 100 company and
you can be pretty sure a gong is heading your way, especially if you have the
foresight to make some political donations.
The "lords on boards" effect may thus be merely another indication of the old
rule of "reversion to the mean". Executives get awarded titles when profits are
strong and the share price is rising, not in the aftermath of profit warnings
and failed acquisitions. Since all companies eventually suffer some sort of bad
news, the disasters are more likely to occur after the honours are awarded. When
the queen brings the sword down on an executive's shoulder, the blade of
Damocles may not be far behind it. *Practical Speculation, published by John
Wiley & Sons
Renaissance man's nine lives.
By LAUREN FOSTER.
1 May 2003
(c) 2003 Financial Times Limited. All Rights Reserved
Illustrious speculator has bounced back from financial ruin and is making the
most of his second chance, writes Lauren Foster.
Victor Niederhoffer must have nine lives.
The illustrious speculator was nearly ruined in the 1987 stock market crash but
bounced back and several years later was named the world's top hedge fund
manager. He went on to write a best-selling autobiography, Education of a
Then, in August 1997, Mr Niederhoffer lost $50m, almost half his funds under
management, after taking a mistakenly bullish stance on Thailand. He recovered
slightly but was forced to close two months later after a disastrous bet on the
S&P 500 index wiped out his fund.
He is again back in business, now trading his own account and managing money for
overseas clients. His second book, Practical Speculation, co-authored with
Laurel Kenner, recently hit the bookstores.
While one cannot judge a book by its cover, as the saying goes, this cover does
reveal something of the character and eclectic interests of its author, a
Harvard-educated scholar with a PhD in statistics and economics from the
University of Chicago.
The montage of personal effects from his home in Connecticut includes a painting
of Sir Francis Galton, cousin of Charles Darwin, inventor of fingerprint
identification and, according to Mr Niederhoffer, "one of the greatest geniuses
that has ever graced the world".
Another painting details Sir Ernest Shackleton's 1914 voyage to the Antarctic
and the tale of survival after his ship Endurance became trapped in sea ice.
The themes of hardship, risk and survival constantly crop up. Before his coup de
grace in 1997, Mr Niederhoffer had risen from a working-class background in
Brooklyn to be a highly successful hedge fund manager.
At the peak of his career, he managed about $130m and his returns - running at
about 30 per cent a year for more than a decade - put him in the top 20 per cent
of future traders. Business Week named him America's best commodities fund
manager in 1994.
Mr Niederhoffer started trading futures more than 20 years ago after running a
mergers and acquisition company that he founded in 1965.
He is regarded by his peers as a brilliant iconoclast and something of a modern
day Renaissance Man, an image he has also nurtured.
The 59-year-old libertarian is both an avid reader and a collector of old books.
Two of his favourite titles - Ayn Rand's Atlas Shrugged and Herman Melville's
Moby Dick - are on the cover.
He also collects seashells, among other things, and says the ocean "is sort of
like the market. It is completely unfathomable and it's constantly changing. And
it's very much the kind of thing that you have to guard against sudden
Looking back over his own personal disasters, he admits he made a lot of
mistakes. After his financial ruin he was forced to sell his famed silver
collection, an act he calls "a just punishment".
He did save one piece, the Manchester Cup, given to the winner of the Steeple
Chase in Manchester, England, in 1904. It is now the mascot for Manchester
Trading, which he formed in 1998.
The five-time US squash champion, who works out daily, quips he returned to
speculating because he could not get a job as an assistant squash coach as the
game had changed. He started a new hedge fund early last year. "Strangely
enough, there were some people that were inclined to give me a second chance,"
The fund is "a combination of a strategic and tactical leveraged fund" and its
strategy is "to take advantage of the unholy avoidance of risk that people are
so prone to after a series of bad years," he said. "I provide insurance to those
who are fearful of the Dow dropping 50 per cent the way it did in 1930".
He believes investors today resemble the victims in Jack Finney's science
fiction novel, Invasion of the Body Snatchers: passive and fearful.
"The body snatchers have the public in its grip and they have everybody afraid
to take risk," he said.
For Mr Niederhoffer, taking risk is key. "I don't know how to make money without
taking the kind of risk that would be disastrous for many people to consider."
But he hastened to add: "No one should think I have anything near a Holy Grail."
Mr Niederhoffer focuses strictly on stock markets around the world and stays
clear of bonds and foreign exchange. "The currency markets are too smart for me.
No matter which way I go, they go the opposite way. Same thing for the bond
He disdains hedged strategies. "The worst thing of all is the fund of funds," he
Mr Niederhoffer is also staying well away from emerging markets. "I've learnt my
lesson," he said. "I won't even go within a block of a Thai restaurant."
When it comes to the subject of the US markets, however, he has plenty to say.
He admits the book has "very heretical thoughts", which is not surprising for a
trader famed for his contrarian approach.
One such thought is that Warren Buffet does not have a message for our times.
Mr Niederhoffer cites the influential investor's comment that had he been at
Kitty Hawk in 1903, he would have shot down Orville Wright as a service to
"Is he mad? Or am I mad?" he writes. "Has not air transport vastly improved
travel and commerce? Is not aerospace the largest US export industry? Yet here
was the most admired capitalist in the world, telling people that investing in
innovative industries does not pay off."
De waarheid bederft snel.
Door Robert Melders.
26 April 2003
(c) 2003 De Morgen.
Beurswaarheden hebben een beperkte houdbaarheid. Daar dachten we nog aan toen de
Financieel-Economische Tijd tot de misschien niet zo opzienbarende conclusie
kwam dat de Belgische beursintroducties, op rare uitzonderingen als 0mega Pharma
na, op lange termijn ontgoochelen. In de herfst van 1998 bekeken we de
beursintroducties en toen bleken introducties van een of twee jaar oud de
beursindexen sterk te overtreffen. Cynici zouden natuurlijk kunnen zeggen dat
beursintroducties op de lange termijn eigenlijk nooit deugen. Eigenaars willen
maar een stuk van hun onderneming afstaan als de prijs eigenlijk te hoog is. Het
feit dat een aandeel ge
ntroduceerd wordt zou op zich genoeg moeten zijn om er
af te blijven. Wie toch aandelen wil kopen, zou dat veel beter twee
dehands doen bij ondernemingen die al langer op de beurs staan. Marc Coucke van
Omega Pharma zou of een filantroop zijn die zijn rijkdom zoveel mogelijk wil
delen, of hij werd bijgestaan door bankiers die niet konden rekenen of hij heeft
met Omega Pharma ook zichzelf verbaasd. Kan zijn.
Dat we in 1998 dachten dat introducties van 1 2 jaar oud wl een succes waren,
kan toch niet helemaal een illusie van het moment gewest zijn. De sfeer op de
beurs was toen ook niet euforisch. We hadden toen net de Azi -crisis verteerd,
de Rusland-crisis was uitgebroken en een mogelijk faillissement van het
LTCM-speculatiefonds begon onrust te zaaien. Het was echt nog niet de tijd van
de grote speculatieve beurszeepbel. Anders zou u nog kunnen stellen dat
introducties beter dan gemiddeld presteren in een stijgende beurs. Een
nieuwkomer op de beurs heeft normaal expansieplannen of hij moet die minstens
voorwenden, anders is het niet duidelijk waarom hij om geld zou komen vragen. In
een expansieve economie zou een groeier beter presteren dan de gemiddelde beu
rsgenoteerde onderneming. Maar we maakten onze berekeningen in oktober 1998.
Onze theorie is niet dat ondernemers die naar de beurs gaan er altijd op uit
zijn om uw zakken te rollen. Dan zouden beursintroducties altijd te mijden zijn.
We denken dat er eerder een leereffect is. Een belegger leert echt wel uit het
verleden, maar hij heeft tijd nodig. Het probleem is dat iedereen zo zeker was
van de waarde van nieuwe beursintroducties. Er waren immers spijkerharde
gegevens om het te ondersteunen. De reactie was dat voor nieuwe introducties een
premie geboden werd, die op de duur tot te excessieve introductieprijzen leidde.
Het is een beetje de varkenscyclus in beleggersland. Als varkensvlees schaars
is, wordt het duur. De reactie is dat veel nieuwe varkenskwekers opduiken. Die
zorgen voor een overaanbod en een lage prijs voor het varkensvlees, waarop een
aantal kwekers het vak verlaat, waardoor het varkensvlees weer duur wordt.
Momenteel zit het idee dat beursintroducties onderpresteren zo diep geworteld
dat de volgende grote beursintroductie waarschijnlijk met een zware negatieve
premie tegenover de rest van de markt zal gebeuren. Het probleem is dat de
meeste ondernemingen tegen die prijs beter geen kapitaal via de beurs
aantrekken. Het is niet voor niets dat nu geregeld doodgewone ondernemingen met
een premie van de beurs gehaald worden. Het komt er dus op neer dat de volgende
introductie relatief te goedkoop zal zijn tegenover de rest van de markt. Maar
waarschijnlijk zal de markt als geheel wel een stuk duurder zijn voor het zover
In de Verenigde Staten werden we deze week met een absurd staaltje van de
geringe houdbaarheid van beurswijsheden geconfronteerd. De normaal aanvaarde
waarheid was dat eerlijkheid en goed ethisch gedrag loont op de beurs. Een
ernstige studie van professoren van wetenschappers van Harvard en Wharton had in
februari nog aangetoond dat goed degelijk bestuur of corporate governance zo kan
worden afgelezen uit de beleggingsresultaten. Een dollar belegd in 1990 in de
groep van de ethische ondernemingen was einde 1999 7,10 dollar waard, rekenden
ze uit. En dollar belegd in het minst ethische staal van hun onderzoek was 3,39
In hun rubriek op www.cnbc.com maken Victor Niederhoffer en Laurel Kenner zich
daar een beetje vrolijk over. Ze kwamen tot de vaststelling dat het veel
voordeliger was om het jongste jaar in ondernemingen met een slchte corporate
governance te beleggen. Niederhoffer mag dan een cynische speculant zijn, het is
een ernstige figuur met een doctoraat in de economie van de Universiteit van
Chicago op zak. Hij vindt de studie van zijn vakgenoten niet onzinnig. Alleen:
met de waarheid van 1999 voor ogen boden beleggers tegen elkaar op voor aandelen
van goed bestuurde ondernemingen. Op de duur werd de premie zo hoog dat beleggen
in de schuinsmarcheerders meer opleverde. Het volstond gewoon dat ze, tegen de
verwachtingen in, hun aandeelhouders nt bedrogen. Bij de
anderen zat goed gedrag al in de koers. Iedere misstap werd contant betaald. Om
het nog grappiger te maken: in de studie van 1990 tot 1999 scoorde Enron zeer
goed voor een degelijk bestuur met onder meer de inbreng van externe
Zou u beleggen in een onderneming waar de grote baas zijn zoon, zijn echtgenote
en zijn familieadvocaat in de raad van bestuur zet? De man die dat klaarspeelt,
heet wel Warren Buffett, merken Niederhoffer en Kenner op. Een reputatie hangt
niet alleen van statistisch goed gedrag af.
Het is een beetje de varkenscyclus in beleggersland.