To print article, click Print on your browser's File menu. Go back Posted 8/9/2001 Related Resources Keep track of Victor Niederhoffer and Laurel Kenner's picks on their Recommendations page. Follow their Dow Reversals portfolios. Share your biotech thoughts and studies at this message-board thread. New features Check out our new StockScouter rating system Find the top-rated stocks What are the top-rated funds? 'Look for hidden value -- in management and in company assets. Shun the account executives' advice like you would shun the plague.' -- One reader's advice Recent Articles • 9 winning serve-and-volley trading tactics, 8/2/01 • Trade like a champion, 7/26/01 • Make money to the beat of the S&P 500, 7/19/01 more...

sponsored by: The Speculator Tips for beating the market competition Trading isn't a spectator sport, so dive into the game armed with the tactics of an athlete. Our surfing, marathon-running, ball-dodging readers share their lessons. By Victor Niederhoffer and Laurel Kenner The market has been ricocheting up and down in recent weeks like the score of a close tennis match. Just two weeks ago, on July 24, the market was at a 3½-month low. Then came six trading days during which the bears couldn't score a decent game. Just when it looked like the bulls would take the laurels, the bears scored victories on Friday and Monday. New stock picks from market professionals every day on CNBC. The pattern of one side making the bulk of the points and then the other side taking the next several points reminds us of tennis, where the server usually wins his game. The recent action thus forms a nice backdrop for the third in our series of columns on what traders can learn from sports. The Austrian economist Friedrich von Hayek once described free markets as an example of spontaneous order, the result of human action but not of human design. To comprehend markets, the tastes, knowledge and circumstances of participants must be considered, rather than any would-be objective standard of value. How one finds value in the markets will vary from person to person. So, we've asked readers to enlighten us on the skills and philosophies they employ when they invest and even when they compete. The response to our latest request for contributions shows the importance of this discovery process. Who would have thought that the key processes lay within the fields of law or karate, or that the contributors would range from an 83-year-old surfer from Hawaii to the young assistant who sits five yards away from Vic every day? They've learned to think on their feet We start with Deb Tyack of Columbus, Ohio, who writes that her sport is litigation. Instead of a grass court, I have just a court. As with investing, preparation is key. At the outset of the contest, one should be so intimately familiar with not only her own case, but her opponent's as well, that there will be no "surprises." However, even with such familiarity, the variables of courtroom drama assume a life of their own, much like markets -- they combine and recombine in ways that simply cannot be predicted, thus requiring an ability to adapt and regroup on one's feet, midstream. Despite the need to adapt to changing variables, however, the litigator should not abandon her core strategy, particularly if the preparation was thorough and solid. Rules of "evidence " are imposed, but that does not mean there is no room for re-evaluating Exhibit A if the witnesses' credibility erodes before your very eyes. Striking the balance between flexibility, adaptability and tenacious adherence to the overall trial strategy separates the flailers from the hard-hitters. Regrettably, the sport of litigation always favors the young because of the constant spurts of energy and changes of pace required. But here's some advice from 83-year-old Vic Hemmy of Honolulu, who profited by holding Syntex until a buyout, as well as IBM (IBM, news, msgs) and Apple Computer (AAPL, news, msgs) through multiple splits. Look for hidden value -- in management and in company assets. Shun the account executives' advice like you would shun the plague. We sent Vic Hemmy and Deb Tyack canes in honor of the old-time speculators who hobbled down to Wall Street to buy good stocks in times of panic. Vic says he probably won't need his for several years. Despite a trick knee, he still surfs and recently won his age class in a one-mile open ocean swim at the Outrigger Canoe Club in Waikiki. They've learned to size up the opposition Readers did not limit their insights to stock selection. Jack Tierney, a Tennessee philosopher, pointed out that in the market you're not playing against one player, but against a whole host. The best game he knows is dodge ball, which every school kid has played since time immemorial. Jack imagines a gym with the market at one end, hurling balls at the rest of us at the other end. We lose a point if we're hit, and we score a point if we throw one back at the market. The easiest targets for the markets are players gathered in bunches -- end-of-month buyers, first-of-year penny-stock speculators, buy-and-holders, investors in momentarily hot industries such as telecom or the Internet. The successful dodge ball player prevails by avoiding the crowd; and when the crowd moves his way, he seeks out other less popular spots. Unfortunately, we have only a finite number of points to lose; when all are lost, we are barred from the game. The market, on the other hand, never runs out of points. Martial arts are always relevant to markets, as the techniques of winning there have a life-and-death significance that is particularly appropriate to trading. The well-known trader Linda Bradford-Raschke of Wellington, Fla., who is also a teacher of Tae Kwon Do, offered these guidelines: A small individual can't use force or strength to overcome a large opponent. You must learn how to use the opponent's momentum, and learn how to yield as opposed to resist. Master the art of detachment and do not react with your ego or emotions. Cultivate a receptive mind. Only by having no preconceived ideas or thoughts can one master the art of reacting spontaneously and naturally without hesitation. Robert Brearley, a reader in West Sussex, England, forwarded the 20 precepts of Gichin Funakoshi, the founder of modern Japanese karate. We found this one particularly appropriate for the market: When you leave your home, think that you have 1 million enemies. They've learned to pace themselves Reader Bob Morris of Venice, Calif. sent some backpacking lore, for trading at high altitudes: Bears are smart, and they teach their cubs. At least rattlesnakes are helpful enough to warn you when agitated. Even a gentle looking mule deer is a wild animal and is quite capable of flattening you if you upset it. And how will you explain THAT to your pals? "I was attacked by an enraged mule deer"??? Being macho at 11,000 feet is not only dumb; it can threaten everyone else in your group, too. The main thing in the market, as we've said many times, is survival. Ralph Di Fiore, a runner who has logged over 12,000 kilometers without injury, offered advice on going the distance: Running should provide a lifetime of benefit rather than some impressive runs followed by lifetime injuries. An investor need look to consistent long-term gains of moderate magnitude rather than short bursts of spectacular gain. Being sensitive to the injury of losing capital allows one to stay in the market game and keep enjoying the maximum benefits. Ralph's advice on avoiding injury naturally leads to the question: How much risk to take? To answer, we'll turn back to where we began: with the server's advantage in tennis. Calculating how hard to serve can provide guidelines for many speculative situations. The harder the serve, the greater the chance that you'll make the point if it goes in. Unfortunately, a hard serve is more likely to be a fault. Then you have to ease up on the second and take what your opponent has ready for you. We have developed a mathematical solution to the serve problem, depending on the slope of the line connecting the hardness of the serve with the probability of winning the point. Thus, if your opponent is very good, you might wish to ease up on the first serve. If he's bad, you can try for a harder serve. (Those wishing to see a chart of this closed solution, as it's technically called, should contact us at dciocca@bloomberg.net.) They've learned to manage risk Rob Wincapaw, Vic's trading assistant, tennis partner and man Friday, had the following observations on risky strokes: Obviously most of the great players can hit the angles and the lines. But the two who most often went for lines and angles and hit them were Monica Seles and Jimmy Connors (especially when he was older -- he knew he needed to take more risks to win as his stamina and foot speed had waned). Seles may have been the best at creating dramatic angles and hitting lines when her opponent had her in trouble or had just hit what seemed to be a winner. As for playing a consistent game, hitting a little softer but with fewer misses, Evert and Borg come to mind. Evert wasn't afraid to take a shot at the lines or go for a big angle once in awhile, but it was more of a calculated risk than an inherent play like that of Seles. These players would rather grind you down from the baseline, making their opponents hit more balls in then they were accustomed to and meanwhile exhausting them as they run them from side to side. Where the market is concerned, you can liken the Evert/Borg type of players to the grinders, traders who look to make a small percentage year in year out and usually do. Then you have the Connors/Seles types who take more risks in return for higher gains, knowing meanwhile if they're off they could have bigger losses. Our own recommendation is that the greater your edge, the less risky you wish to play. One of the worst things that Vic did when he ran his hedge fund was try to be No. 1. That left him open to severe play from superior opponents. But leaven this with the following comment from a 2550-rated international chess master who is a stellar researcher for a major hedge fund: If the weaker player has the choice of playing two equal positions, he should prefer the less complicated one, since he is less likely to go wrong. Conversely, when I play a weaker opponent, I will not simplify the position unless it increases my advantage. Thanks to all who contributed. We welcome all comments, particularly those that relate the market to sports, music, animals or ecology. Send your observations to the address listed above. We will reward the best contributions with our trademark Speculator canes. Next week, we'll finish up our sports series with a column on how traders can learn from what athletes do after the game. At the time of publication, neither Vic Niederhoffer nor Laurel Kenner owned any stocks mentioned in this column. 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.