Daily Speculations

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 ...



1,074 words

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 650m, was eventually sold in

1999 for 81.7m.


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. 20.95p.




Technically, these methods don't work.



965 words

7 June 2003

Financial Times



(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

balance, unprofitable.


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

18th century.


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

Nicholas Taleb**.


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, 20.95 **Fooled by Randomness,

published by Texere, 204pp, 18.99 philip.coggan@ft.com




Lords on the board - PHILIP COGGAN LOMBARD.



367 words

3 June 2003

Financial Times



(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.



966 words

1 May 2003

Financial Times



(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,"

he said.


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.

881 words

26 April 2003

De Morgen


(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 w[1]l 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. E[1]n dollar belegd in het minst ethische staal van hun onderzoek was 3,39

dollar waard.


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 sl[1]chte 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 n[1]t 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.