Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner

19-Jun-2006
Trading Lessons from "The Last Samurai," by Rudolph Hauser

As some of you know, I do not as a rule comment on trading lessons as I myself do not trade. Even when I was working for Oppenheimer and for Oppenheimer Capital my focus was always on a longer-term horizon. But on thinking about a movie I saw on AMC last night, "The Last Samurai", I decided to make an exception as there seemed to be many valuable lessons for traders (and many others too) in that movie. For those not familiar with the movie, it deals with an actual period of Japanese history, namely the Meiji Restoration and a last war of resistance to a change in their status and way of life by the samurai. It is told as the story of an American hero cavalry captain (a fictional creation, I suspect) who drinks to deal with his guilty conscience for having taken part in a slaughter of an innocent Indian tribe. His superior officer whom he hates as that officer was responsible for the attack comes to him with an offer to help train a Japanese army of raw recruits in modern warfare techniques at a pay level he cannot afford to turn down. A minister in the government whose railroad properties are being attacked wants this army to move to stop it even thought the captain demonstrates that they are not yet prepared to fight. But his hated American superior agrees to engage. Despite their guns, which the samurai refuse to use, the raw army suffers a horrible defeat. The American captain participates. The samurai leader spares his life because the captain fought so bravely and well. He is helped to recover from his wounds in the rebel's winter mountain retreat. There he slow comes to appreciate his captors and in time starts to learn Japanese and their customs. He comes to love them and finds some peace with himself. During a truth the samurai leader goes to the capital only to find himself held as a captive. The American captain who had been freed helps to rescue him. He joins the samurai in a final battle with the now trained, well armed and numerically superior army in which the samurai actually gain the upper hand for much of the battle thanks through there great skill and shrewd battle tactics, only to find themselves mowed down by an array of Gattling guns kept in reserve at the rear of the army line.

The first lesson is the army's disastrous attempt to fight the superb samurai warriors before they are adequately trained. The army is unable to function with their weapons in the heat of the battle and is slaughtered. One lesson here is do not attempt to trade in a big way until you have learned the techniques of your trade and know them well enough to be able to carry on without emotions of fear driving you to panic and trading disaster when events start to turn against you. The captain is most impressed while he is a captive by how the samurai train relentlessly from dawn to dusk to prefect their fighting skills. Those are the skills that allow them to even attempt to go against guns with swords and bows and arrows. Constant practice and efforts to improve one's skills helps to make a better trader is the second related lesson.

While at the winter camp, the samurai are attacked by a group of ninja. We do not know who sent them and perhaps there where just added for dramatic effect. But the point here is that aside from different fighting techniques that emphasize stealth, the fighting skills are similar, as is the fact that both sides did not use firearms. Still fighting those ninja off was a difficult task, and they came close to killing the samurai leader. The trading lesson here is that no matter how much you work hard and practice, you still might not have an edge because there are many others doing the same thing as you are. Even an edge in insight will be lost in time. One of the ironies was why computer techniques did not lead to better trading results. One person having such techniques would indeed have a great edge. But soon all will have the methods and tools. You will have to spend more and work hard just to keep up, but that alone will not continue to give you an edge when your competition does the same. The result for the industry is more expense without greater returns. One has to constantly continue to come up with new better ideas and techniques in order to maintain an edge.

The final battle (see above) has an important lesson. If you are very good at what you do, you may be able to remain profitable for some time against those using better more modern techniques, but in the end you cannot expect to come out ahead when the other side is using superior new techniques. No matter how well you do what you do, it may not be good enough. This ties in with an overall lesson. As Milton Friedman has observed what differentiates man from other animals is not the ability to reason but a tendency to rationalize. The samurai clung to their old weapons and fighting methods that had served them well for so long partly out of force of habit and pride. But these changes threatened to remove them from their privileged place in society with all that meant for their prosperity and power. When ordinary people could use new weapons with modest training compared to the long and intense training of the samurai, they had lost their edge in society that they were not willing to lose. So the insane tendency to refuse to embrace the new which they claimed would be depriving them of their ancient culture-- which is the terms in which they expressed their reason for resistance-- was in part an act of rationalization of an attempt not to face the reality of the change in their status. It would have made far more sense to use the new weapons and attempt a coup using them then to go on or to find other ways to employ their skills and habits (which they eventually did). This is a bit like those who learned to trade using traditional technical analysis or traditional Graham & Dodd methodologies and falling to embrace newer statistical and quantitative techniques that give traders such as Vic an advantage. Doing so would require new investments in learning those methods, admitting what one did in the past was no longer good enough and therefore in a sense having been wrong, and facing the prospect of looking like an amateur compared to those who had already mastered the new techniques. Far easier to denounce the new as having flaws and claiming the old methods are superior, just as the samurai did. But too often that leads to fatal failure.

Considering the early setbacks in the final battle faced by an overconfident army which was drawn into a trap by the retreating samurai, we are reminded that even with superior means one can overlook certain factors because of overconfidence and simple oversights that could be fatal- as Long Term Capital discovered. There are times when the old methods combined with some acceptance of change can lead to victory, as the Russians in Afghanistan found out Elements such as the unusually cold winter facing Napoleon in his Russian campaign can also result in defeat. In the end there is much that can defeat a trader, no matter how good they are, how modern the techniques, how much they work and how much they practice. Too much is happening and unpredictable events can cause havoc in the best of plans. Trading like war is a high-risk business.