The Speculator
Market tricks we fall
for again and again
Recommend a stock to a friend, it invariably goes
down. Buy a mutual fund for your aged mother, and it's sure to be the worst
performer ever. Some things are almost guaranteed to happen.
By Victor
Niederhoffer and Laurel Kenner
"Even funnier than the man who has been made
ridiculous is the man who, having had something funny happen to him, refuses to
admit that anything out of the way has happened and attempts to maintain his
dignity."
Charlie Chaplin (1918)
Is there anybody among us who in the past three
years hasn’t had the market kick him in the behind, trip him, drop ice cream on
his lap, play with his heart and leave him forlorn?
If Charlie Chaplin were alive, he would develop a
character called “The Little Investor” who would make us all smile through our
tears. It’s almost laughable how foolish we all are, how all too human. And no
one has succumbed more than the Spec Duo. Yes, we bought fallen biotech angels
on a layover stop south, and yes, we loved Nasdaq 100 stocks when they were
down 50% at what turned out to be near the summit.
It often happens that people learn much more from considering the humor of
situations than they could from a lifetime of sermons on investment heresies.
Let’s face it: the market mistress will always be about her job of getting us
in trouble. We could cry into our soup. Or, like the Little Tramp, we can get
up, fix our ties, straighten our derby hats, clutch our canes and keep walking
down the road with injured dignity, shaking our heads at the cruel things the
market manages to do to us -- things that we conclude with much regret are guaranteed
to happen.
The surprise rise
When we receive 100 vitriolic messages for writing a bullish column, the
market is guaranteed to start a major rally.
All the bear funds that made money in 2001 and 2002 are guaranteed to
cover their shorts on big rises in 2003, providing a catalyst to every big
rally. This happened during the week of March 15, when the average
trend-following hedge fund lost about 15%, and it will happen again.
The number of initial public offerings and secondary
offerings is guaranteed to hit bottom just before the market is ready for a big
run-up.
After you explain to a friend the risks involved with a stock trading near
$1, it is guaranteed to rally 200% in the next three weeks. It happened with American
Airlines (AMR, news, msgs) from March 12 to April 2.
(Passed along by John Lamberg)
After your losing position penetrates your stop loss and you sell at the
absolute low of the day, the stock is guaranteed to begin a multiday rally.
(John Lamberg)
The market is guaranteed to rally just after investors call their broker
and say, “Put me in cash.” The end of the decline in stocks came on Oct. 9,
2002, when Scott Schermerhorn, who directs investments in large-capitalization
companies at Columbia Management Group, which oversees $170 billion, told
Bloomberg News that investors were “completely losing confidence.”
Suffer, suffer, suffer
When things are so bad that you go abroad to get away from it all, it’s
guaranteed that the local news will report an all-time high in the distress
index of the country you’re visiting, as well as an all-time low in business
confidence. The department store across the street from your hotel will be in
the last days of an auction sale with few if any bidders in sight. The
front-page headline in the major newspaper will say, “Pension funds shun
shares,” and a cartoon of a dog in its house titled “Shares in the Doghouse”
will accompany the report, which notes that pension-fund holdings of shares are
at an all-time low. The hotel you’re staying at will appear to be teetering.
All of the above happened to Vic this week in London. He stayed at a hotel
owned by a Chinese chain whose Hong Kong hotels are seeing business drop off a
cliff because of the SARS epidemic. Across the street, the venerable department
store Selfridges is for sale. Things are so bad in London that even the
lotteries are losing money.
After a few down years in the stock market, half the investment books on
Amazon’s bestseller list are guaranteed to be exposes of American business
corruption or forecasts for Dow ($INDU) 1,000. The other half will
be about how to make money in real estate.
After the S&P 500 ($INX) falls 50%, gurus are
guaranteed to urge investors to stay out of stocks if they hope to retire with
a nest egg. The problem is that these advisers picture investors as amiable
idiots; they forget that in the 1-in-100 chance that the investor might not
make 5% a year for the next 50 years, he or she might be smart enough to adjust
his or her retirement plan or risk profile to ward off disaster.
After the market has been down a few years in a row,
the bears are guaranteed to go for the jugular. Their main theme will be that
no investor should own any stocks at all. The financial media is guaranteed to
play up these end-of-the-world predictions, while anyone who says the 20th
century’s 1.5 million percent return in global stock markets is likely to be
repeated in the current century will be ignored or held up for ridicule. Such a
fate was granted to us when our book, “Practical Speculation,” hit the
bookstores in March with the S&P at 800.
The root of all forecasts for Dow 1,000 is hatred of the enterprise
system. Proponents of such predictions are guaranteed to believe that
government should control our resources because business is totally corrupt and
has terrible growth prospects.
The ever-changing cycles
Industries that performed worst in one year are guaranteed to be among the
best performers in the next year. It’s happening this year with
information-technology stocks.
After an academic market strategy has been thoroughly tested and proved
robust in all circumstances, someone will start a hedge fund based on the
findings and is guaranteed to promptly take a 50% drubbing. It happened with
small stocks in the 1990s and with share buybacks in 2000.
The mutual fund you bought for your mother five years ago is guaranteed to
be the worst performer in the world today, and if you sell, it is guaranteed to
rise.
The Fates, the Furies
Companies with the characteristic most recommended by corporate governance
advocates are guaranteed to perform worse than other companies. It’s happening
with the current pet recommendation that the job of CEO and chairman be
separated because of the conflict of interest. Since year-end 2001, the 378
S&P 500 companies with CEO-chairmen have returned some 6 percentage points
more than the 122 companies where the hats are worn by different people.
Companies that boast that they have a ready hoard of cash available for
strategic acquisitions in related fields are guaranteed to be carried out by
the corporate undertakers in the near future. And when a CEO boasts that his
strategy is to buy highly successful companies that wish to sell out to him
merely because he can guarantee their protection from corporate interference
and bureaucracy, he’s a doubly sure bet for the corporate funeral parlor. In 40
years in the mergers and acquisitions business, Vic never once met an owner
willing to take a dime less than he could possibly get. The working environment
wasn’t even on the list of concerns.
The latest fashions
A good friend who has been out of the investment field for 20 years is
guaranteed to call you up after a 20% stock market decline to say he made 80%
on gold last year and is going to start a hedge fund.
An investor who buys into a fund of funds that allocates its money evenly
between long- and short-oriented hedge funds to be “market neutral” is
guaranteed to be down 99% after 10 years, less commissions and spreads.
After gold or natural gas goes up more than 25% in
any three-month period, radio stations are guaranteed to run numerous ads
touting the superiority of those investments over stocks.
The media
After a down week in the market, the leading financial wire service is
guaranteed to run an outlook story saying, “Stocks may decline next week.”
After a 12% rise in the market like we had from March 12 through March 21,
the bearish columnist at the leading financial newsweekly is guaranteed to
sigh, quote an expert saying that it was just a bear-market rally, and predict
that we’re going much lower.
No matter the situation, the media is guaranteed to seriously
underestimate the United States’ chances of success.
Immediately after a major market move, the media is guaranteed to trot out
an analyst who will point out that the market “had to” move that way because
“the major trend line was broken.”
When the Money Honey tells us, “Tech is back,” it is guaranteed to be time
to sell all stocks.
The smart money
When you ask an insider why he sold his holdings in the company just
before a dismal earnings report, he is guaranteed to say, “To pay off a marital
settlement.”
Two weeks before a company is scheduled to deliver a speech to securities
analysts, it is guaranteed to show a substantial rise.
The politicians
When the bear market enters a fourth year, Alan Greenspan is guaranteed to
deliver a speech blaming infectious greed and irrational exuberance rather than
the Fed’s raising the funds rate by a full percentage point from February 2000
to May 2000 while the stock market was collapsing.
During the years before presidential elections, parties out of power are
guaranteed to devote themselves to keeping the economy down. The party in power
will be devoted to hyping the economy.
The talkers
When the market goes for 2½ months without once registering two
consecutive up opens, as it did from Nov. 29 through Feb. 18, bears are
guaranteed to say that U.S. traders couldn’t manage to fight the bearishness of
the smart money in Europe. When the market opens up seven days in a row, as it
did in April, they will say that futures traders are making futile attempts to
hype stocks.
From trader Tom Ryan: “When I ask traders what they
think about interest rates, I have never had anyone say, ‘Well, Tom, I don’t
follow the bond market much and don’t really know too much about the
interest-rate environment at present.’ The longest discourses on Fed policy are
guaranteed to come from stock traders, and the strongest opinions about stock
values come from bond traders.”
Tom further observes: “When the market has rallied three or so years in a
row, the sell-side analysts are guaranteed to trot out this old saw: ‘If an
investor were to miss the 10 best days in the equity market in the past 20
years, their total return would have fallen to X% from Y%.’ Now, how does this
work exactly? How do I start out fully invested on Day One of the 20-year
period, but somehow miss the best 10 days while staying invested on all the
other days? What is the probability that could happen?”
Final note
Send your “Guaranteed to Happen” ideas to us by e-mail.
When we have finished training performers for our flea circus, we will send you
an official Old Speculators’ Association cane. It’s very useful for hobbling
down to Wall Street in times of panic, where you might follow the example of
the old-time Specs by picking up some good stocks, turning a quick profit,
buying some real estate on the up-grade, depositing the overplus with your
banker and returning to the bosom of your happy family in the quietude of your
splendid home.
For performance data on companies where the CEO is also chairman, visit
our Web site,
At the time of publication, Victor Niederhoffer and Laurel Kenner did not own any of the stocks mentioned in this column.