To print article, click Print on your browser's File menu. Go back Posted 7/26/2001 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. It’s no accident that sports and trading are so similar. Games were created to mirror the crucial risk-reward decisions we face in the game of life, whether in finance, marriage, jobs, education or sports. Recent Articles • Make money to the beat of the S&P 500, 7/19/01 • Baseball's lesson: Invest in home runs, 7/12/01 • Biotech: An investing frontier for risk-takers, 7/05/01 more...

sponsored by: The Speculator Trade like a champion If you haven’t already grasped the many useful lessons that transfer gracefully from the playing fields to the trading floor, hold on. This week, we’ll tell you how to put on your game face. By Victor Niederhoffer and Laurel Kenner The roads to victory and defeat cross the same ground in sports and financial markets. After all, the fundamental goal in each pursuit is to win, given the resources brought to the table, expected edge, potential variability, duration of the game and point at which the game ends in victory or ruin. Money Plus. Easy online tools and free Bill Pay, too. Today, we begin a series on the lessons that various sports hold for the speculator. Most of the analogies will be drawn from racquet sports, leavened by insights from readers on other games. The last few columns that Laurel and I have written were about such subjects as baseball, biotechnology and technical analysis, areas in which we admitted having no expertise. We compensated by relying on the smartest specialists we could find. On the subject of racquet sports, however, I do not need to rely on outside experts. I was undefeated for 10 years as U.S. squash champion, won a few national titles in paddleball, was winner or finalist in a handful of state tennis and ping-pong tournaments. Steve (Hobo) Keeley, the holder of numerous national titles in paddleball and racquetball, kindly refers to me as the greatest all-around racquets player of all time. That may be stretching it some. I defeated Marty Hogan, the greatest racquetball champion, in a world series of racquet sports a few years ago, when I couldn’t move more than a few steps because of a bad hip. True, Marty let up against me in racquetball, but here’s Lesson No. 1: A player should never let up in sports or markets. As for trading, during four decades in the game I’ve been at the top and, once, at the bottom. For the past four years, I have been trading stocks and futures for my own account; the results have not been completely ungratifying. I’ll start with ways that investors can learn from the preparation that comes before the first ball is served. Next week’s column will deal with what goes on during the match, and the final piece will discuss what to do after the game. It’s no accident that sports and trading are so similar. Games were created to mirror the crucial risk-reward decisions we face in the game of life, whether in finance, marriage, jobs, education or sports. As Paul Heyne points out so admirably in our favorite introductory economics book, “The Economic Way of Thinking:” “Everyone who makes a decision in the absence of complete information about the future consequences of all available opportunities is a speculator. So everyone is a speculator.” With that in mind, we’ll examine how the greats prepare to play. Pick your spots On the court: The beauty of both sports and markets is that you can choose when and where you want to play. If you’re a tennis player, you might choose to stay away from the relatively uncontrolled conditions of grassy courts, the surface on which Goran Ivanisevic, who wasn’t even seeded in the top 100, won Wimbledon. In the market: I strongly recommend the buy-and-hold strategy as a winning game for all who have satisfactory long-term staying power. But there are certain times when it is best not to enter the market tournament. We bought some highly speculative issues at the end of last year and were pleased to see them participate in a spectacular rally. In March, at the prodding of our friend Sam Eisenstadt, the chief researcher at Value Line who insisted that we were just lucky to catch an unusually strong January effect, we recommended taking profits and going to the sidelines. Decide how much risk you’ll take On the court: All great players will tell you that the thing they hate the most is when an inferior opponent plays a risky game -- creating confrontation, going for broke, going for the lines on every shot. That’s the only way the better player can lose. When I was squash champion, it annoyed me to no end when an opponent decided to end a game on a one-point tie breaker, when we could have decided the outcome by playing several points more. Art Bisguier, a chess grandmaster, tells the story of how he once made a sharp move in a game against a world champion, Tigran Petrossian, and Petrossian asked for a draw. Art, who believed that Petrossian had an edge, asked him why he did it. Petrossian said rivals Mikhail Tal and Paul Keres were walking by and he was afraid that if he didn’t accept Bisguier’s challenge, they would consider him a coward -- but if he did, he might get beaten. So he took the middle ground, and that was the right thing for a world champion to do. Bottom line: When you have an edge you should play a conservative game, but when you don’t you need to take risks. In the market: In speculation, the house almost always has the edge. The “house,” of course, is the operator of the casino -- the Nasdaq market makers, NYSE specialists and brokers. That’s why the speculator should go for big profits. Only the house can grind. If your gains are quite limited relative to your returns then the only constant will be the vigorish extracted from you in commissions and bid-asked spreads. Of course, we don’t advise crazy gambles. In April, Laurel and I laid out an investment framework modeled on the defensive strategy of chess master David Bronstein (“Invest like a market grandmaster”). My trading approach is based on statistical analysis; last week, for example, we offered a method based on statistical expectations involving monthly S&P patterns. (“Make money to the beat of the S&P 500”). Have a game plan On the court: Before the game, prepare. There’s no time once the play starts. I loved it when my opponents had to take an extra few minutes in the warmup to practice a shot. I was always at the court two hours before I played. All good players know that the action during a game is too fast-paced to rely on improvisation. All possible scenarios must be practiced and planned for in advance; your opponent will be sure to have done so. In the market: Do all your studies at least two hours before the open. Run the various scenarios. Prepare for the million different situations that may result from a government or corporate announcement. Once it happens, there won’t be time to react. As we write, the last day of the month is approaching and I already have my basic trading strategy planned out. If the market is down at the end of the month, I’m likely to buy for a short-term swing back up. If it’s up, I’ll take a Petrossian-like approach and bide my time. Stamina In the mountains: Pamela van Giessen of John Wiley & Sons, the editor of our forthcoming book, “Adventures in Speculation,” notes that cyclist Lance Armstrong, who as we write is in the lead for a third consecutive Tour de France victory, says the race is almost always won in the mountains, where stamina, pacing and knowledge trumps eagerness and speed. In the market: The larger your asset base relative to your fluctuations, the better able you will be to take advantage of the situations when your studies tell you that you have the edge, whether it’s to buy and hold for the average 10% a year gain, or to step in for a traveling waltz step (see our article last week). Mind the equipment In sports: No matter what, if you don’t have the proper equipment, you are a sure loser. Good tennis players can be observed carrying at least six tennis racquets to their matches, each one strung to the same tension. Strings and racquets have a way of breaking down, and if they do, the change to unfamiliar equipment can be calamitous. In the market: How many traders do you know who have confided to you that they lost a fortune when their data feed to the market went down, their broker’s line was busy or, worst of all, they were engaging in an activity they were unwilling to interrupt by indelicately answering the telephone? A bullish sign With the S&P falling on Tuesday to its lowest point since April 10, the remaining holders of stocks are very strong -- the same kinds of competitors that you meet in the quarter- and semi-finals of a tournament. The lofty appearance fees and high implicit returns these investors demand are bullish props under the market. The crowd can only expect to watch good matches in the future, particularly in August. An invitation to readers Do you use insights from sports in your trading? Write to us at dciocca@bloomberg.net. We’ll reprint the best, with credit, and award the writers a cane, in honor of the old-time speculators who used them to hobble down to Wall Street in times of panic. 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.