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The
Speculator
Are you an
investing predator -- or prey?
Crocodiles dine on
complacency, lions dine on fear -- and the markets dine on
those who see no lessons to be learned from the animal
kingdom.
By Victor
Niederhoffer and Laurel Kenner
Talk about deception and camouflage, about
being faked out of your boots by a market move. It happens all
the time, but the moves around month-end for bonds and stocks,
the two major markets in the financial world, were classics.
Generally speaking, last days of months are good for
bonds, while first days of months are good for stocks. As June
turned to July, the norm held. Bonds looked like the best
thing in the world on the last day of June, and stocks looked
like the best thing in the world on the first day of July.
But everybody who said: “Oh, an easy way to make
money. Buy bonds on the last day of the month, stocks on the
first day!” had their pockets turned inside out as July turned
to August. The table illustrates the guile in the moves of
these markets:
| As the month turns
… |
| Bonds |
%chg |
Stocks |
%chg |
| June 30 |
0.6 |
July 1 |
0.5 |
| July 31 |
-2.2 |
Aug. 1 |
-1.0 | |
How
to keep from becoming prey to such dupery? We reached into
animal lore and the survival techniques of the oldest recorded
civilizations, on the theory that today’s hunters -- traders
and investors -- might find a proper footing there.
Crocodile in wait
One thing we
came up with is an investment lesson straight from the
crocodiles: Never try the same trade twice in a row. As Vic
learned on a trip to Africa and Australia, crocs lie in wait
for prey where they’ve caught previous meals. Wildebeests are
often victims of reptilian recall. Out on the African plains,
a migrating herd that makes the mistake of crossing a river at
the same point two consecutive years is likely to be waylaid
by the same crocodiles that dined on wildebeest there the year
before.
Vic visited two crocodile farms and several
zoos and aquaria where they were featured, talked with
zookeepers and read a few books. He found that crocodiles
learn well and have great memories. Apparently the croc’s
cerebellum is quite large relative to its brain, for a
reptile. On a visit to the Australian zoo, he learned that
many crocodiles there hate Steve Irwin, TV’s "Crocodile
Hunter," more than other keepers. They remember that he
captured them. Crocodiles lie in wait for zookeepers in the
same place they enter each day, and they can tell one keeper
from another.
As a result, Vic can verify that a good
fisherman should never fish in the same place twice, as a
crocodile can remember where you were. He will be swimming
submerged through his territory and mapping out a plan of
attack in case you come too close to the water. Similarly, it
is advisable never to trade the same way in one week that you
did in another, as humans have incorporated all the wisdom of
the crocs through their written language and lore.
Readers with croc-like memories might well ask why the
Spec Duo, who regularly tell them to remember Robert Bacon’s
"Secrets of Professional Turf Betting" and avoid switching
strategies, now seem to be recommending exactly that. The
answer is that Bacon was warning about switching after losing
trades in a never-ending chase for the elusive profit. What
we’re talking about here is switching after you’ve won.
A 3 million-year
strategy
Crocodiles, so successful at taking
advantage of other creatures that follow routines, are
themselves very much creatures of habit. For the last 20
years, African crocodiles have nested on the same day, Sept.
14. The regularity of this crocodilian rite resembles that of
another highly successful survivor on the other side of the
world: the horseshoe crab.
During a kayaking trip at
Cape Cod, Laurel learned that these unassuming crabs have
survived in their present form for 3 million years, and she
took home some lessons in survival:
- Optimize. The female horseshoe crab lays eggs
only at the highest of high tides, at full moon in May, June
and July. She leaves the water and climbs to the highest
point on the beach, where the eggs are safest from
predators.
- Compete. Each male has a large claw used solely
to hook onto a female as she climbs up the bank. As many as
four or five males will ride along with one female. At the
top of the hill they all do what needs to be done to
fertilize eggs.
- Build immunity. A horseshoe crab’s shell has no
cracks or holes or gouges, because it is so good at healing
itself. So potent is the crab’s immune system that
scientists use its blue, copper-based "blood" in medical
tests for detecting all sorts of viruses and bacteria. In
investing, immunity corresponds to paying attention, cutting
losses, keeping adequate reserves and staying away from
crocodiles.
Lion in the
wind
"Jock of the Bushveld", by James Fitzpatrick,
is a South African classic that describes a bull terrier’s
birth, hunting, companionship and death, a la "Call of the
Wild." Jock is the smallest and ugliest of the litter, but he
refuses to stay down when toppled. The other dogs quickly
learn to let him eat what he wishes. His owner is a tracker,
hunter and transporter who becomes the director of a major
mining company after Jock helps him bring a wagon of supplies
to the Transvaal gold rush. The book describes how a dog
learns from noticing the behavior of its enemies. A passage
about lions contains much wisdom:
"We had a
lot of trouble that night, as one of the lions persistently
took his stand to windward of the cattle to scare them with
his scent. It is a favorite device of lions, when tackling
camps and outspans, for one of them to go to windward so that
the terrified animals on winding him may stampede in the
opposite direction where the other lions are lying in
wait."
Now we ask, if lions can do it, why can’t humans
in the market do it? And while it fits, we don’t mean the
exemplar is George Soros or Paul Tudor Jones buying a little
to test the market before selling a huge amount, or the floor
trader running stops or breaking the round number before
taking it back big the other way. We don’t mean the kind of
move where the S&P 500 ($INX)
breaks the opening range on the downside by 5 at 989 and then
goes to 1,003, getting other traders to stampede on the buy
side only to be eaten by the bears lying in wait on the other
side. What we mean is the way the market can lure you into
complacency, say with gold down a bit or a series of up
Fridays, while the lions on the other side are waiting for the
kill.
A noble
death
When Jock grows too old to hunt, he becomes
the guard dog at a supply house (always the best way of making
money in a boom). He dies a noble death, mistakenly shot by
the owner while defending the goods against a pack of wild
dogs. To avoid a like outcome, the Spec Duo is retiring from
our column as of Sept. 3. We enjoyed writing our 180
consecutive columns for CNBC on MSN Money. Most of all, we
have enjoyed the ideas, encomia and critiques from our
readers.
There are so many things we would have wished
to write about, and we are composing an appropriate farewell
in the tradition of Don Quixote. For the benefit of our
readers, we will try to tie up all loose ends on our site at
http://www.dailyspeculations.com/,
and we encourage last-minute queries and salvos to us via e-mail.
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