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?
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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
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.