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Posted 3/22/2001
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The Speculator
Riches to rags and back again
Vic Niederhoffer knows a thing or two about loss, having lost not only millions but a career and relationships -- and he knows a thing or two about getting it all back.
By Victor Niederhoffer and Laurel Kenner
The experts make the most of their wins and draws, and the masters make the most of their wins, draws and losses.
-- Tom Wiswell, undefeated world checkers champion from 1956 to 1981
Today, our topic is loss, something with which we have far too much experience.
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Readers devastated by the $4.6 trillion loss of wealth in the U.S. stock market over the past year are asking how to rebuild, how to live with themselves, how Vic handled his own bout with disaster.
The two of us hadn't met yet -- in fact, Laurel was busy at her last job editing, among other things, the story of Vic's downfall. So Vic will tell the tale.
Gone: Tens of millions and one career
I grew up poor in Brooklyn and founded a highly successful mergers and acquisition business. Since 1981, I had devoted my efforts to building a money management firm, trading for a major hedge fund as well as for friends. By mid-1996, I had a 15-year record of 35% annual returns. Most of the rating services in my field ranked me number one or close to it for periods up to three years.
On Oct. 27, 1997, it was all lost in an instant when U.S. and Asian markets suffered big simultaneous declines. I won't go into details, but tens of millions were lost. The cost to me and my family was enormous. However, the thought that my investors, employees and suppliers had lost money along with me was even more painful. Most people never had what I had, so this may seem irrelevant. But I had gone from having a successful business career to no career in the space of one minute.
Merely to deal with the aftermath -- the disappointment, the lawyers, the accountants, the mortgage brokers, the liquidators -- was a full-time job that seemed likely to take up 100% of my time for the rest of my life.
In my sister's psychology book, I read the 11 signs of clinical depression. I had all 11 of them.
Checkers and Kipling
Recovery came gradually. One time-tested method that I found very helpful was to engage in flow activities -- things like sports, sex and hobbies -- that take the mind off the woes. I started playing checkers again through the MSN Game Zone. There, I could always find 2,000 players around the world at all skill levels ready to play a game with someone wishing to immerse himself in an orderly world. In checkers, unlike markets, the same rules always hold: Pieces can only move to consecutive squares, unless another piece is in the way, in which case they can jump over.
I drew inspiration from the thousands of proverbs passed along by my checkers teacher, Tom Wiswell:
- When you lose, it is the price you pay for becoming a better player; there is no glory without danger and disappointment.
- The losing player who knows where and why he lost will not likely to lose that game again.
- When is a loss not a loss? When you have learned something new and important.
- Defeat is no respecter of players; all are vulnerable.
- Study your victories a long time and your great defeats twice as long.
Friends and family sent me 55 copies of "Tuesdays With Morrie," presumably to help me deal with the thought of death a bit better
I also received 10 copies of the Rudyard Kipling poem "If," which remains an inspiration. Some of the senders underlined these words:
And lose, and start again at your beginnings
And never breathe a word about your loss;
…
If you can force your heart and nerve and sinew
To serve your turn long after they are gone
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on!"
…
If you can fill the unforgiving minute
With sixty seconds' worth of distance run,
Yours is the Earth and everything that's in it
And – which is more -- you'll be a Man, my son.
Gradually, I began crawling back up the stairs. I sold my world-class antique silver collection to raise a trading stake. The results have not been altogether unsatisfactory. The liquidity has been sufficient to pay for private-school tuitions for my six daughters. When my gains become particularly pronounced, I occasionally buy growth stocks for their anticipated million-percent-a-century returns.
I also widened my horizons. In January 2000, I started writing stock market columns with Laurel. We have heard from thousands of readers, many of whom say our articles are their favorites, and hold regular correspondence with many of them.
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| Price | 23.890 |
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Fortunately for me, I had gained much experience in losing from my career in racquet sports. The key to coming back there was to solidify the base of operations. In the case of squash, where I was undefeated national champion for 10 years, that meant practicing the backhand stroke until I could hit all shots from that side. It also meant improving my speed and stamina so that I could employ proper strategy when the important matches started.
Translated to the market, that would mean making sure that I had a rudder to choose the stocks to buy and sell. I thought that Value Line, which has had an estimable record for 50 years, was a good place to start. As Laurel and I started testing various stock-picking methods, we choose stocks with Group 2 timeliness rankings or better, and restricted purchases to companies that had insider buying in the last two months.
Knowing when to quit is as important as knowing how to come back. Amazingly, the first time my father introduced me to baseball, Jackie Robinson hit an inside-the-park home run, and the sight left an indelible imprint. Jackie, who remains my favorite player, liked to say baseball is like a poker game: Nobody likes to quit when they are losing, and nobody wants you to quit when you're ahead.
I did quit after a meteoric career as a pro racquetball player in the 1970s. I was ranked in the top 10 worldwide, but after a few star wins, including an upset 21-20 victory in the third game over Martie Hogan, the greatest champion of all time, I began to lose terribly. Taking stock, I realized I was not fast enough and that my shots were too high from my training in squash. I concluded I would never be able to make a dent on the pro circuit, so I gave it up.
Laurel reached a similar conclusion on the way to a fairly alluring future in classical piano, after winning a few important contests. Knowing that life as a performer would be one of intermittent windfalls, and realizing that she was too impatient to be a teacher, she opted for the financial comfort of a steady paycheck.
Applying this to stocks, some of us tend to trade with too short a time horizon. That may be feasible to someone who can devote all his time to the market, and has a great training in games, but might be a road to disaster for most of us because of the excessive vigorish -- that is, trading costs, or commissions -- that must be overcome. Similarly, buying stocks on margin is not for everyone – nor, sad to say, is buying growth stocks.
As Wiswell says, "Reflecting on your losses can teach you much more than your wins." And it can prepare you for a much more secure ascent in the future.
When Laurel takes a hit on her stocks, or one of my traders loses money, I counsel against trying to "make it back." It's better to concentrate on what the best strategy is now. As Stanley Jevons put it 130 years ago in "The Theory of Political Economy:"
The fact is, that labour once spent has no influence on the future value of any article; it is gone and lost forever. In commerce, bygones are forever bygones; and we are always starting clear at each moment, judging the values of things with a view to future utility.
Counting forward
As we write, loss is a timely subject. Declines of the magnitude seen over the past 10 days have occurred only six times over the last six years. In all six cases, the market was up substantially six days later, on the order of 5% or more in S&P futures, on average. Thus, it is likely that by the time you have a chance to digest this, you will not be as dour as we are now. As Wiswell says, "From the best scares often come the best scores."
We counted in other ways and found similarly bullish results. As we write, S&P futures are down 148 points in the last 20 trading days. Of the 28 times that this has happened over the past seven years, the market has been higher on 21 occasions one week later, with an average gain of about 2% and a variability about twice that level.
Similar results occur when the S&P ($INX) is down more than 100 points in a two-week period.
The results are particularly bullish when the last day of the period is down, as it is as we write Tuesday on the Fed announcement of a mere 50-basis-point cut.
Our preliminary results show that these tendencies apply also to individual bellwether stocks such as IBM (IBM, news, msgs) and General Electric (GE, news, msgs), and industry groups such as biotech.
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It's a sad coincidence that while writing this column about loss, we received word of the death of Mark Kessenich. A powerful leader who took risk-averse Citibank to the heights of fixed-income trading in the ‘80s, Mark died Tuesday morning from Lou Gehrig's disease. When Laurel told his story in our Nov. 23 column, "A trader triumphs as his era ends," Mark already had outlived the averages. He used his last years to set up a foundation to help others with the disease, and was trading a six-figure account despite having lost the use of his voice and limbs.
We can't help noting that his death came on the day of a Federal Open Market Committee (FOMC) meeting. Mark was successful in bond trading for many years because he was better than anybody else at decoding what the Fed was up to. The era of the big bond traders faded with inflation in the mid-1990s, coinciding with Mark's withdrawal from managing his firm. As we've been witnessing one of the nadirs in the Fed's history, we will dare to hope that the era of the all-powerful Fed also will come to an end, and that the day will arrive when the financial world no longer hangs on the latest FOMC pronouncement.
When we visited Mark two months ago, he was still able to smile and conduct business. We are delighted to report that his last words to us were to thank us for the MSN MoneyCentral article that brought his struggle and indomitable spirit to the attention of readers. He is an inspiration to all who suffer devastating loss.
At the time of publication, Victor Niederhoffer did not own any of the equities mentioned in this column. Laurel Kenner owned IBM.
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.