Letters to the Editors June 2006 Write to us at: (not clickable). Please include your full name, and omit attachments

Notice from the Editors: Competition for Contributions

27-Jun-2006
A Few Thoughts from Dan Grossman on Titan: The Life of John D. Rockefeller, Sr.

Ron Chernow in Titan cannot begin to understand when Rockefeller says he did more good creating and running Standard Oil than in all his (extraordinary and innovative) charitable giving. The Rockefeller family should be ashamed for having put the great story of John D and access to the family records in the hands of a writer with so little appreciation of what their founder did and how unjustified some of his critics were. But the John D story is so good that it comes through despite Chernow. Better perhaps to read Horowitz and Collier, The Rockefellers.

26-Jun-2006
On the Gates/Buffet News Conference, by Laurence Glazier

This event left me feeling a little uneasy, I can't put my finger on why. Except for one point of which I have experience. Melinda Gates describing one of the Foundation projects in Zambia, where a problem in administering oral medicine is the lack of food to take with it.

I hope the funds are applied with great care together with judicious planning.

Yoffi replies:

I would like to express my concerns that are partly the same as Laurence stated and others as well in different contexts of this bi giant foundation. To me , additionally, good intentions must include good second order consequence assessment , first before the design goes into execution and second as it unfolds into reality.

Without being overly harsh and drawing mainly on my 30 years of experience in third and second world countries and working documents that were shared , I think that the intentions of Melinda and Bill will create the following:

1. More babies in Africa will live longer only to die in hunger later and usually before reaching 30 years of age.Medicine will be effective in dealing with some diseases, but the emphasis on a few selected diseases will taint the need for an overhaul of the habits and due care health methodology that would ,otherwise,breed other killers, some already in the offing.
2. More programs will compete for the vast money allocations with alleging of their being educators of excellence and providers of infrastructures, but lacking a solid tie between what expected productivity ,what living will be made possible in a few years between the investment and the region or country true potentials. The likely scenario will send more graduates abroad and not help economic growth in Southern or other part of impoverished Africa.
3. Frustration will be more intense, as these realities sink in within the donor institutions and countries who barely scratched the surface of need. Apathy , fear and desolation will be more salient, among the "target populations", if this phenomenon is humanely possible at all.

The holding of a baby in your hands, especially a sick baby , is a beautiful feeling if you know that you intend and can do something to nurture a productive and healthy human being. When you run a multibillion foundation you do have a responsibility to plan with both mission and end-of -project -statue extremely well defined.

Failure should be as important to avoid as hoping for the expected results.Being a great marketeer that Gates was when he sold us a second rate operating system does not suggest much by way of his talents to actually reach modifications in critical human performance. Clearly he sold it all to Buffette, but it needs to effect others that might be more concerned if this pie can be eaten by very hungry people in USA and abroad. From what I have seen more mid course correction needs to apply to the Foundation, and I just hope that I have seen less than what is available to plan and execute these efforts.

26-Jun-2006
Tadd Fujikawa, Amateur Golfer, from Steve Leslie

Here is a question for you. You are 5'1" tall you are 15 years old. You weigh 135 lbs and were born 3 months premature weighing less than 2 lbs with a 50% chance of even surviving. If you are even remotely going to consider a sport to compete in what would it be?

Obviously basketball is out of the question as is football and probably baseball. Volleyball forget about it. What is left? How about golf? Better yet how about trying to compete in the most difficult golf tournament in the world on one of the most difficult and hallowed golf courses anywhere in the world at Winged Foot in Mamaroneck N.Y. Are you serious? Golf? To play with Tiger Woods, Phil Mickelson, Vijay Singh and others. To compete in a tournament whose past champions include Jack Nicklaus, Arnold Palmer, Gary Player, Hale Irwin, Tom Watson. To travel 5000 miles from your hometown just to get there?

Wait a minute lets get real here. After all you are only 5'1" tall you are smaller than the average golfer by a foot. Why not think about something else.

Not if you are Tadd Fujikawa amateur. Who? Tadd Fujikawa from Hawaii. Second youngest person ever to compete in the U.S. Open and the smallest but with a heart as big as the pacific ocean. And who by the way, hits his drives an average of 285 yards.

Tadd Fujikawa who by the fact that because this is the U.S. Open Championship format and being open to anyone who qualifies in a sectional event is welcome to play alongside the greats of the game. Now I am sure that he won't win the tournament or probably even make the cut. But none of that hardly matters for Tadd is once again a marvelous example of the greatness that exists in each of us, that if we refuse to put limitations on ourselves that literally there is no obstacle that cannot be overcome or any adversity that can not be conquered.

25-Jun-2006
The Reality of the Movie Making Business by Stefan Jovanovich

Stravinsky was asked why he chose to live in Hollywood (he was there for nearly a decade during the same time Ayn Rand was also in residence). Instead of saying "for the money" (which he like every other Russian emigre needed), he answered "Because it is the only place where one can escape it."  What he meant was that, once you have seen the mechanisms of the film business, it loses its magical qualities and becomes just another business.  It is, as both Stravinsky and Ayn Rand and everyone else in it knows, a "hits" business.  One of our clients put it this way: "You can make a killing but you can't make a steady living".  I hesitate to correct my good friend and fellow Daily Speculations contributor, Steve Leslie, and I hope it comforts him and others to learn that not all of the people on the list of "very rich" goofballs are, in fact, rich.  Neither Alec Baldwin nor Al Franken nor Bill Maher is "very rich" because none of them has owned even a small piece of a "hit".  That remains poor Al Gore's problem.  For all the publicity, neither his cable network nor his movie has managed to attract a significant number of advertisers or paying customers.  Rush Limbaugh makes more money in a week than Gore, Franken, Maher and Baldwin combined have made since the last Presidential election.

Hollywood was not formed "in large part by those who had recently escaped the excesses of Europe" unless by that Laurence Glazier means the pogroms of the 2nd half of the 19th century in Poland and Russia. The Jews who founded and owned the major studios did not consider themselves to be émigrés, and the biographies of the major figures make it clear that they viewed the refugees from Nazi Germany with a certain amount of suspicion (as did many other Americans). As for the stars who "performed as heroes", there were many more who did so in front of a camera than in real life. For every Jimmy Stewart (25 missions with the 8th Air Force; stepson killed in Viet-Nam) there were at least 5 John Waynes (4F - college football knee injury). The people in Hollywood who actually went to war were a distinct minority. When John Ford was shooting They Were Expendable (one of the best of his films, and a near total flop at the box office), Ford needled John Wayne daily about his not having served in actual combat until the co-star Robert Montgomery, who had actually fought in the war, asked Ford to stop because it was making the crew uncomfortable. Like Wayne most of them had spent the war making movies.

24-Jun-2005
Neanderthals of Investing, from Marlowe D. Cassetti

Neanderthal (Homo neanderthalensis) was a successful human species that populated prehistoric Europe and Mediterranean regions for over 200,000 years. Archeological records suggest that the Neanderthal's basic tools changed little over that long period of time, until the introduction (invasion?) of the modern human species, Homo sapiens. From that time forward their tools did show technological advancement until their the Neanderthal extinction.

One consequence of throwing snowballs on the schoolyard was the punishment of after school detention. I wasn't released until I added up many large columns of numbers and added them correctly. Not liking the detention hall, I developed a knack of rapidly and accurately adding columns of numbers. At the end of WWII my father gave up his medical practice and became a full time "stock operator." Consequently I found myself spending a lot of boring hours in the stockbroker's business establishment. Once while I was nosing around the place I asked an elderly man, called Max, what he was doing with all his paper tablets and stock charts. I was quite familiar with stock charting but the endless sheets of calculations were puzzling to me. He explained that he was computing moving averages and he asked me if I wanted to help him with his calculations and plotting. He told me that moving averages were a powerful secret that we had to keep quiet. That was okay with me and I jumped in.

Adding up large columns of stock prices was at first awkward since it involved adding price data in dollars and fractions of dollars but soon I could zip through them. Also the old guy had some shortcuts that facilitated the process. At last we had numbers for the 10 day, 20 day, 50 day and 100 day moving average. These were carefully entered on special graph paper and compared with the daily price bars. To a young lad who was at first bored, I was excited by the prospect that somehow all this stuff was very powerful. Max thanked my father, complemented my quick grasp and a good lad. Out of earshot dad told me that Max was a local character who had consistently lost money but was always trying to find the Holy Grail of trading.

It is curious to me that many "experts" tout the magic of moving averages. How often I hear "it has moved down and is trading at its 50 day moving average" at which point they explain that if it fails this important boundary that it will surely fall to the 100 day (or pick a number) moving average. Another shouts over the radio, "your broker will never tell you about moving averages!" Are we seeing the Neanderthals of investing who continue to revive ancient tools?

Marlowe D. Cassetti
Penrose, CO

25-Jun-2006
Response to PIMCO's June 2006 Global Central Bank Focus, from Boris Simunovic

Dear Mr. McCulley, I am a Vienna (Austria) based Asset Manager (Global Macro) and an interested reader of your monthly publication. Being an adherent of the Austrian School (not for patriotic reasons, most Austrians nowadays do not know about the Austrian School and at University one only has Keynesians doesn't prevent me from accepting your conclusions. However in this month's article I have to disagree on certain points, such that I have decided to write you an email.

1.)Austrians say Investment = f(savings) whereas Keynesians say Investment -> Income -> Savings, and you seem to agree. To me this statement is puzzling: Imagine a situation where there is no capital stock in a country. The country consumes all it produces. Unless somebody decides to consume less, i.e. save to undertake an investment (say, building tools for hunting) the capital stock of that society cannot grow.... To me the Austrian line of reasoning sounds correct.. The Keynesian causal chain starts with Investment not analyzing where this "first" round of investment has come from. The argument is counterintuitive since Investment seems to fall like mannah from heaven

2.) For Keynes writing at a time when the Austrian "solution" was de facto being applied, called the Great Depression.. Apart from your suggestive style (linking Austrian "Solutions" to the GD) it is simply not correct to say that an Austrian system had prevailed at that time:

a) The gold standard which was reintroduced after WWI was done at an artificial (namely politically determined level, as opposed to a level determined by a market system consistent with Austrian theory). Ludwig von Mises himself back at that time heavily critisized the way the Monetary system was reformed, and "predicted" the subsequent course of events (the spec bubble in the 20's a.s.o) (There was also another economist whose name I do not remember) Unfortunately I will have to look up the details in my library at home to provide you with details (what exactly went wrong and where to find Mises's analysis).

b) As you (and Bernanke, see his book) know the situation was exacerbated by the wrong macro policies from around the world (imposing of trade controls, interfering by reducing money supply to maintain an artificial peg) stemming from a bad understanding of macro mechanisms (weird folks would say a conspiracy was going on). It is clear however that such actions are not supported by Austrians and hence, in my understanding, we were far away from an Austrian "solution".

3.)Austrians recognized the effect of Asset prices on malinvestment and the inherent boom bust cycles in the capitalist system: Boom bust cycles are only caused by central banks (or other entities interfering with the "unhampered" market) according to Austrian theory. You can have a boom and unsustainable investment pattern in cotton production in the us caused by government subsidies, or a house bubble as a result of particular CB policy...But a capitalist system is defined as one in which private property and enterprise prevail.. there is no need for entities (such as a government regulator) which interfere with the "unhampered" market, i.e. a "capitalist" system can exist without them. Austrians would not conclude that it brings about boom bust cycles.

4.) You are of the opinion that Asset prices matter and and should be subject to preemptive strikes via regulation (page 4): Apart from the lagged effects associated any type of Keynesian policy tool you, as an asset manager, are aware of how inconclusive the evidence one uses as the basis for ones decision making is. The best one usually can come up with is a probability distribution for the outcomes. A good asset manager then associates this pdf with his own or his clients' percieved utility function to achieve above average returns...This is decision making in theory. In practice few people are capable of producing reasonable probability distribution for future events (comes only with experience and an open mind) and fewer people even know how much risk they can truly handle (i.e. few people are decision makers). I doubt that regulators qualify for this job description. What makes you the chairman of the Fed is not a carrier as a decision maker (a consultant gets paid a high salary tied to a small bonus). Academics as any other "caste" are subject to vanity (the main reason the female reporter was told things Bernanke didn't dare to say in an official speech, Thanks to Vic for this insight) ..Being a PhD student myself I sometimes wonder when renown academics tell me how they made it into top journals (something along the lines: this guy published because he is married to the daughter of the editor). I know these are soft as opposed to "hard" arguments but nevertheless I believe them to be valid. Consequently I do not see how persons acting as regulators can qualify for the job of managing the most important macro economic variables.

Last but not least I have a question. I agree that the action of the Fed since the bursting of the bubble can be interpreted as writing a free put...If you say that the new Fed chairman is aware of the deflationary consequences resulting from asset bubbles, does that imply that there is now a hidden cap in US asset prices?

Boris Simunovic
ZZ Vermögensverwaltung
Asset Management

21-Jun-2006
An Apple a Day, from Andrew Moe

I bought a Macbook today from the Apple store at UTC Mall in San Diego and can report that I haven't seen the mall that crowded since X-mas. Apple's thriving storefront was mobbed yet some freaky looking goat-teed kid in a black t-shirt got me out the door with upgraded DRAM in 30 min. I've been in retail long enough to know a business that's printing money. Those Apple stores print money. That's the way the game is played.

20-Jun-2006
Cruise's Smile Captures Tokyo, from Shui Mitsuda

Tom Cruise is in Japan to campaign for his new film MI 3. Along the way, he has met a Japanese minister. The minister thanked Cruise for introducing Japanese culture in the movie The Last Samurai, and requested him to film his next movie in Japan to promote more foreign visitors to visit Japan. Tom shakes the minister's hand and says, "if I can have whole of Tokyo for a night," and the minister says, "the Japanese government will fully corporate!" I don't know if it will materialize, but as I watch Cruise, I just find it he is a heck of a diplomat and sociable person. And, his smile is great.

19-Jun-2006
It's "Goaaalll" Time!, from Bilal Raja

For those of us outside the USA, every four years we fall into a football induced dream. What new joys will this year's tournament bring? Which underdog will defy the odds, giant-killing along the way? Which new player will spark our enthusiasm and love for the game (again?). Which team will have us dreaming and fantasizing? Who will score the best goal ?

My first world cup memory is of the 1986 finals in Mexico. I remember sneaking away from my 6th grade exam study material, and parking myself in front of the tv for the England - Argentina quarter final. This was the first time I saw Maradona and my love for true footballing genius was born. The day was memorable because it etched two very different images of Maradona on the footballing world's collective memory. The first was the infamous "Hand of God" goal, when Maradona scored with his hand over the English goalkeeper, Peter Shilton (who was probably a foot taller than the diminutive Argentinean). Maradona later had the cheek to say he had not cheated, but that the goal was a little bit hand of Maradona, a little bit hand of God. Minutes later, Maradona scores what is definitively one of the best goals scored in world cup history. He slalomed past about four or five defenders (a couple of them twice), and then slotted the ball home when it looked like he was about to lose his balance as he got tackled from behind. Each tournament since then, I've always looked forward to seeing goals that are beyond the imagination and are pure instinct, pure genius.

My other favorite is from 1998 and was scored by another number 10, Dennis Bergkamp of Holland. (FYI other no 10s to have graced the global game: Pele being the most famous and Maradona, Bergkamp, Ronaldinho, Baggio of recent vintage). Bergkamp received the ball from over his left shoulder in the last few minutes from the de Boer, controlling it dead with his instep whilst in midair, flicking it to the left of the defender and then final flick over the keeper into the corner. This is what football was meant to be.

This year's tournament has already brought a few great goals despite the fact that we're still in the first round. However, the goal that already sticks in the memory already is the Cambiasso goal (Argentina's second in a 6-0 win over Serbia & Montenegro). This was a goal I tried to find repeatedly in sporting highlights on Friday because of the beauty of the move that actually led to the goal itself. And here in lies the dilemma. Is a great goal that which is instinctive and representative of the individual genius or can a goal be as brilliant if the result of a series of moves? ( The difference for me is moot. One is an immediate feeling of elation and adrenaline rush. The other is more similar to a crescendo. Why try to differentiate between the two? )

The Argentinean build up play started from their own half, involved no less than 24 passes and was constantly probing the Serbian team to try and find its weak point. Back and forth the Argentineans played the ball, until they sensed where the opening was. Right in the middle. So the pace of the passing increased, and the ball quickly found its way to Crespo, who calmly backheeled the ball whilst running away from the goal (the equivalent of a no look pass) into the path of the oncoming Cambiasso who scored with a cracking volley. WOW. What a move! No individual flourish (apart from the great back heel) but the team combined to score one of the goals of this tournament and set themselves up as the favorites.

When I saw the goal repeatedly on Friday, it occurred to me (maybe because of triple witching in the US & Europe) how that goal was actually very similar to market activity in the way there was constant probing to try to find where the weak player was. Once they figured it out, the ball was quickly moved there and ruthlessly dispatched to goal. There was the element of the con (the backheel), the element of moving back and forth, before the final surge forward. There was the sudden switch from left to right to set the goal up (similar to how when the market is focused on one thing, it's often something unexpected that bites you in the keister).

But most of all it reminded me why I still love this game. Because occasionally, when you least expect it, you see an act of such beauty that you memorize it so you can describe it to your friends who didn't see it, or to tell your son when he's old enough to start to care about sporting beauty, and finally, so you can be involved (however vicariously) in its creation and fulfillment.

16-Jun-2006
A Letter on Brazil and Opportunity Costs, from Henning Menke

Dear Vic,

I live/study in Sao Paulo, Brazil, largest city in whole America. I wish you could tell me your view on the opportunity cost of living here instead of studying overseas. I study mathematical economics in a nice, famous college here and probably will also take another graduate program in statistics at another university. The local exchange here (Bovespa) is still mostly made of real investing instead of speculating and swing trading, the options market is only made of Calls (no puts here) and the Futures exchange (BM&F) is very big but still for a small speculator it is difficult to work with, they only work with large lots.

So my point is, is it too big of a disadvantage live in Brazil for a wannabe trader? Is possible to succeed in such a country or do you believe it'll grow enough to feed opportunities for young men like me?

And how was you're path from teacher to fund manager, as I always thought that the natural way was starting out in a bank to then go to self, or fund, speculating.

About you're article: "Leverage". Isn't Correlation the best way to quantify the `wheel and axle` relationship?

regards,

Henning

Victor replies:

I would come to the more global markets in London or New York based on what you say, albeit now with electronic trading you can access any market any where in the world any time.

16-Jun-2006
The Fortune Cookie Indicator, from Jeff Sasmor

My favorite technical indicator is the fortune cookie. And the one I got tonight at "Sunny Garden" (which bills itself quite humbly as the "Best Chinese Restaurant in Princeton") was no slouch: "Do not give up, the beginning is always the hardest." (Lucky Numbers 19, 22, 24, 27, 35, 45).

Mine is the sign at the Jehovah's Witness display in Brooklyn. The dead will rise.

Hey, Aren't those Fibonacci?

16-Jun-2006
Thoughts on Japanese Liquidity, from T E.

Did the end of QE (quantitative easing) have a big impact on money supply here in Japan? Is that why repo rates are moving higher? Is there a real story here? Is this the end of global liquidity?

Have a look at my calculations:

M2+CD 714 trillion yen
CAB -23 trillion yen (cab = current account balance)

The result: (+3.2 %), but this calculation does not make any sense, as CAB is not a part of money supply. Indeed, this is a typical misunderstanding of gaijin investors. Bottom line: the drain of Japanese liquidity is a myth. Sure the opportunity cost of holding risky assets is increasing, but the stock of outstanding money is not really changed.

14-Jun-2006
Martial Arts and Korea, from Alan Millhone

Just now read Scott Brooks article and it brought back my own memories from 1971. At that time I was stationed at Ascom Depot, Korea with the 199th. PSC (U.S. Army). After I was 'in country' for a time I learned that a Korean Black Belt from Seoul came down by train once a week and gave instruction on Tae Kwon Do. Mr. Yee was a small man, but do not let size fool you! He helped train some of our troops in Vietnam and he once showed me a photo of himself and General Westmoreland together. He trained in Seoul under the Mudokwon style and was a good instructor and I sometimes wonder what became of him after I was discharged.

Tae Kwon Do (and other martial arts) teaches self discipline and how to  control of one's mind, develops confidence and physical fitness. It was a 'memory jogger' to read Mr. Brook's article and I know he is very proud of his family and their accomplishment.

14-Jun-2006
A letter from reader D. L.

Hello Dr. Niederhoffer,

I just read your email to the spec list about receiving numerous letters from the "other side." Now, I know I am not one of even just a handful of people have sent you a letter from our side of the camp. Nonetheless, I wanted to write a letter to you, albeit brief. Firstly, there is no need to respond to this email because I know you have been receiving many emails and it's most difficult to answer them all.

You have taught me so much on how to look at numbers, data, and the important variables that it saddens me to think that people are so naive in their market outlook. But then again, it doesn't. You are right in your assessments. I, too, have counted and have back tested numerous scenarios (though not with as much math and economics as you and your team) and have come to only one conclusion: "It's a bull market."

There will always be momentarily reversals. Some may say this exceeds what I constitute a momentary reversal but I answer them that the numbers don't add up to being a bear market. The primary reason, I feel, for the present market reversal is a mixture of two main variables. The first is the unfortunate and self-serving comments made by the Fed chair. The second is the momentary psychological bias (by a bunch of trend following sucker fish who are feeding off a dead, stinking carcass). These two variables have "never" constituted a continuance of a particular direction, let alone weighty enough to reverse a great bull market.

Once the bearish micro burst has dissipated all the sucker fish will be sardines eaten by the smarter predators.

11-Jun-2006
A Checker Story, from Alan Millhone

Hello Dr. Niederhoffer:

I just now got back from the yearly week-end Checker Tournament at Grove City, Pa. I had breakfast this morning with Mr. Ed Bruch of New York. He drove 7 and 1/2 hours to get to the tournament. He is one of the top rated players in the World and is a Grandmaster. He has studied and played Checkers since he was 12 and to play him you will find him as tough as nails. His mind is sharp and full of interesting stories about his 33 years as a policeman and his Checkered travels will fascinate you for weeks. He retired in 1986 and looks forward to each tournament that he can attend. Our American Checker Federation yearly "Arthur Niederhoffer Youth Tournament" and our "ACF 3-Move Restriction Tournament" will begin next week-end in Medina, Ohio. (Full details can be found on the American Checker Federation website.)

Oh, I almost forgot: Mr. Ed Bruch is 90 years of age and still going strong.

11-Jun-2006
The Goddess of Trading, from Laurence Glazier

Does the Goddess have a name? Chess has Caissa and our living planet has Gaia, both unique appellations. I have considered Zahava, combining the Hebrew for gold and love, but this is already in common use as a name for mere mortals. She must, one would assume, have a name, perhaps already ascribed by a forgotten poet.

08-Jun-2006
E-mini Observation, from Jay Pasch

At the risk of creating clutter for the Captain with such menial effort, one forwards the observation that since 1/3/2006 the area approximating the 20/260 adaptive moving-average (120 min continuous pricing) to be a potential input for the Captain's calculations; four hits from above, two from below, and looking for predictive measures for the next approach.

05-Jun-2006
Couldn't Disagree More, from Mike Humbert

From Keep Out of Those Switches:

First there is the switch of position: The professional trades long, only, because there is the least unfavorable percentage against a long position due to long term positive market drift. He never goes short; that keeps him out of the amateur's position switches.

Going long only because of a slight statistical advantage is like:

Only being allowed to hit forehand in a tennis match, even if the shot dictates a backhand to win.. but you cant, because statistically your forehand has a 10% advantage over your backhand. Historically that is or asking a "professional" boxer to only use his right hand, forgetting his jab because, statistically, he stands a better chance of knocking the person out with his stronger punch. That is the goal right?

Or only opening with E4 in chess (best by test, right?). Even Fischer himself had to mix it up due to his opponents strength/weakness. Or only playing AA or KK in Texas Hold'em. Everything else is statistically inferior! See how long it takes your opponents to figure that one out.

If I would've missed ER from 780 - 700 or ES from 1320 - 1250 with oil rising, bonds & dollar dropping with severe overbought conditions. I would be ashamed to call myself a "trader" professional or not. Isn't flexibility a more "professional" trait?

In my lowly amateur opinion, if a trader cant easily go short, as well as long, he is not 100% correct in his/her trading. You are not giving yourself every advantage. Every chart will confirm this.

05-Jun-2006
Steve Leslie recommends "Different and Unequal," by Ludwig von Mises

Although lengthy I found this to be profound and well worth the read.

Different And Unequal:

The doctrine of natural law that inspired the eighteenth century declarations of the rights of man did not imply the obviously fallacious proposition that all men are biologically equal. It proclaimed that all men are born equal in rights and that this equality cannot be abrogated by any man-made law, that it is inalienable or, more precisely, imprescriptible. Only the deadly foes of individual liberty and self-determination, the champions of totalitarianism, interpreted the principle of equality before the law as derived from an alleged psychical and physiological equality of all men......

4-Jun-2006
Barron's and the Birds, from Tom Marks

Just when it looked like the bloom was coming off the commodity rose.

Walking past a newsstand this morning, I spied a splashy cover story on the bow-tied bull and his Chinese menu of physical plays. It sort of reminds me of those times in a restaurant when one guy presumptuously takes it upon himself to order for the entire table: "Yes, good evening, we'll have the sugar, the corn, the cotton, and the copper and zinc, of course."

I read the articles, if for no other reason than to better understand the ways of propaganda. And while doing so, I observed through the window two birds involved in a bit of a dance. Fine and brightly breasted creatures, they were hopping to and fro along a ledge, though always the larger one bringing up the rear. It's a ritual fundamentally universal to all fauna, one which prompted a smile. Because I knew that full well that the randy pursuer across the way was looking to do to his petite pursued today, exactly what this latest wave of media hype would like to do to my metals shorts tomorrow.

I love this game.

4-Jun-2006
Question Regarding "Practical Speculation," from Terrry Williams

Victor, I have been recently re-reading your excellent book (written with Laurel Kenner), "Practical Speculation" and I have a question that constantly keeps going through my mind.

You debunked a lot of myths and exposed a lot of the false hero worship in the business world. It is sometimes difficult to recognize all the propaganda and avoid false assumptions. The business media constantly idolizes people that have become self-made billionaires and I often wonder: "How do these people get there? Is it luck? Is it a secret recipe that can be followed? Is it some combination?".

Victor, what percentage (some sort of principle components type analysis) would you give to the following four factors (or maybe others I have not thought of) of how the average self-made billionaire gets to be where he is:

1. Luck (unrepeatable. Being in the right place at the right time with an amazing opportunity and the ability to take advantage of it.)
2. Genetic endowment of some kind (repeatable for that individual but does not allow other people to replicate the success).
3. Skills imparted to the individual when they were a young child (not replicable for people that have grown up but replicable for the children of parents who want to teach their children these skills).
4. General principles or rules (therefore open to be replicated by anyone who carefully follows the principles or rules).

Thank you, in advance for any answers and any insights you can offer, Victor! These questions have been going through my mind for some time now.

Victor Niederhoffer responds:

It is important to be part of the idea that has the world in its grip to be a billionaire. And that idea is the entitlement of the redistributionist society.  Many billionaires have that. Most of them make it thru leveraging and compounding without a take from the service. Many of them have a great survival instinct. I would say the three components are Galtonian. Do read, Human Faculty. The first component is being responsive to what others want, the second is persistence, combined with business like organization, and the third, is having access to large amounts of capital, associated with mentoring from a good man. A fourth component is the ability to go for the main chance combined with the survival instinct. It is crazy to see so many billionaires who hate the enterprise system, but they are all very good at compounding out of the realm of the service.

Dr. Alex Castaldo adds:

In reply to Victor's question:

"What percentage (some sort of principle components type analysis) would you give to the following four factors?"

You are asking for an additive decomposition (PCA). It is important to understand that the success probability is multiplicative. Each of the four factors mentioned by Victor must be close to 1 (or 100%) for the result to be Success; conversely if any of the factors is near zero, the result will be near zero.

(And when you look at it closely, the factors are themselves derived from multiplicative subfactors. For example people trust you with large amounts of capital only if you have successfully handled medium amounts, and the only way to learn that is if someone previously gave you small amounts and you did okay with that. Etc. Etc.)

Reading Getty's book, How To Be Rich, it is clear that he might have failed at any number of steps along the way. For example after he discovered his first well he retired, thinking he had enough money. That would have been the end of the story (lack of Factor #2: persistence).

Steve Leslie mentions:

Not that I admire nor revile the man, but I recall that Trump is a very avid reader. I recall in one of his self-promoting books that he said he reads newspapers and business publications in the morning and biographies at night.

I have in my personal collection of books one that is titled, "Og Mandino's University of Success." Og Mandino is one of the early self-help writers. This book contains 50 chapters that are written by a variety of authors.

In it you will meet such authors as Dr. Russell Conwell, founder of Temple University and his very famous Acres of Diamonds speech. This in an of itself makes the book rewarding. In addition, just a few more are Rich Devos, founder of Amway, Norman Vincent Peale, Dale Carnegie, Benjamin Franklin, W. Clement Stone, Maxwell Maltz and Napoleon Hill. This is really an exceptional book in that each chapter is short and to the point.

I don't remember who said it but, "One idea can take you around the world." I also recall that 95 percent of America's population never reads even one book a year. Curiously, I also read that at retirement age most can't afford to retire. And the average lifespan of an inheritance is 18-24 months.

For those who commute regularly or don't like to read, (I know, perish the thought, Chair!!!) I suggest a visit to Nightingale Conant. There you will find 100's of cd's from some of the top contributors in the world today.

I leave with this thought -- Knowledge is not power, applied knowledge is.

Dr. Kim Zussman comments:

One could in part invoke the "consistent with randomness" clause.

Last week we drove through the desert on the way to a mountain resort, and we passed through Palmdale and Victorville. 30 years ago, both these towns had been desolate desert outposts, with dusty ranches and a few homes. But the combination of aerospace jobs (Palmdale is near Edwards AFB and now co-located industry), and escalating real estate prices in commutable Los Angeles, created opportunities for builders to construct affordable tract homes. Anyone who held acreage in the path of progress was made wealthy, but it would have been impossible ex-ante to anticipate the direction of growth.

A late friend who had been a rock musician in the 60's owned several parcels in the California deserts and mountains, but none turned out to be the right spot on the roulette wheel and the land has not even appreciated with inflation.

Would Gates still one day be #1 had he been born in May 2006? Would the talents and interests which led him to exponentiate computing for the masses still put him on top had this revolution already occurred? One can make the case that the most adaptive will sense the changing winds and adjust accordingly, but such flexibility is tempered by the amount of love, time, and effort it takes to master any field to the point of Victorville.

04-Jun-2006
Equatorial Regression, from Dr. Kim Zussman

Mr. Highland's comments about Latin American poverty related to parasitic diseases got me to wondering if it is true that tropical nations are poorer, and why. Seems like many of the poorest nations are clustered along earth's waistband, and maybe all the political explanations are largely hand-waving along the lines of how much personality is due to genes vs. upbringing.

This data was used to regress GDP/capita vs. |LAT|:

The regression equation is
GDP/CAP = - 169 + 458 LAT


Predictor Coef SE Coef T P
Constant -169 1595 -0.11 0.916
LAT 458.23 49.35 9.29 0.000


S = 8512.40 R-Sq = 46.1% R-Sq(adj) = 45.5%

Nations wealth goes up very significantly as you get further from the equator. Here is the scatter plot which shows the relationship. Can't see parasites here, but it would seem unlikely that the same bugs would infect equatorial Africa as do Latin America. Another hypothesis would be that hot climates make for lack of industry (personally and societal), and this could be tested using (say) average temperatures of various countries.

Other interesting features are seen in the data itself (columns are country, |lat|, and GDP/capita, respectively):

Near the top are the low latitudes, and notice that Singapore is an outlier (high GDP, low lat), and if you stroll down Taiwan and Hong Kong don't fit well with their collats. At the other end with high latitudes and usually high GDPs, Russia and her former bloc states stick out where they don't belong.

So another hypothesis is that national wealth results from equatorial distance, provided you don't have 72 years of socialism or the Asian wild card (i.e., wherever they are they do well). And an investment thesis, assuming global warming keeps going, is to buy that little tike some future Goldilocks acreage in northern Canada or Alaska where it will be not too hot or cold.

4-Jun-2006
Politically Correct View of Why Nation's Grow, from Dan Grossman

Yes there are parasites. Just as there are harsh winters and a thousand other roadblocks to building a rich, free society. But isn't it clear to most people on this List that it is the intelligence and creativity of the population, combined with a relatively pleuralistic, libertarian political set-up, that makes for a successful civilization?

I am surprised no one has mentioned Jared Diamond. Like the forty people who gave Victor copies of Tuesdays with Morrie, I can't tell you how many people have told me how wonderfully Diamond's books explain the West's advantages based on some better farm animal or the spread of germs by Europeans. How ridiculous. The Thomas Friedman of anthropologists. A collection of interesting facts but always the wrong conclusion.

Why honor or even read about "dead white men" who brought us the scientific and industrial revolutions, political freedom and an average standard of living superior to any king or queen a couple of hundred years ago. It was just luck. Just some minor aspect of climate (perhaps accompanied by Western "exploitation") kept Africa and the Muslim world from being equally successful to Britain and the US.

Marion Dreyfus adds:

The Muslim world is hampered by a consistent backward-looking mindset that -- though it uses innovations when introduced by others -- is loath to originate, since they venerate the 8th century above all, and yearn to return to it; not a scenario suitable for innovation and growth. Africa has no infrastructure and no incentive, two major handicaps, as well as a formidable need for catch-up that will take decades before any meaningful advances are made on their own.

President of the Old Speculator's club offers:

Or how about this...the more equality, rights, and freedom granted to women, the more advanced the society and its economy. As much as he'd like to be king of his entire domain, the non-farm male will eventually have to choose between mastering his business and/or career or the hearth. If he hasn't as yet obtained wealth he'll be unable to use retainers to rear and instruct his children, leaving that to his spouse - who will be empowered by this new position and responsibility. It happened here as we moved from an agrarian economy - it will happen elsewhere. Where it doesn't (e.g., the Mid East), the economies, like their philosophies, will remain backward and undeveloped. This might be countable if satisfactory bounds for measuring slavery, chattel, partially free, and totally free could be established.

3-Jun-2006
Cats and Stars, from J.P. Highland

As I mentioned recently, I have just completed Carl Sagan's "Cosmos" which I found as useful as Bacon's "Secrets..." for our business.

One of the chapters that I enjoyed the most was, "The Lives of the Stars," in which Sagan describes the cycles that stars experience through their lifetime.

"... the hydrogen fusion will shut itself off. Meanwhile the self gravity of the Sun will force a renewed contraction of its helium rich core and a further increase in its interior temperatures and pressures. The helium nuclei will be jammed together still more tightly, so much that they begin to stick together , the hooks of their short-range nuclear forces becoming engaged despite the mutual electrical repulsion. The ash will become fuel, and the Sun will be triggered into a second round of fusion reactions... this process will generate the elements carbon and oxygen and provide additional energy for the Sun to continue shining for a limited time. A start is a phoenix, destined to rise from its own ashes... the Sun will become a red giant star devouring the planets Mercury and Venus... after the central helium is all used up, the interior of the Sun will continue its postponed collapse..."

Through my daily observation of NYSE stocks I've witnessed the same process. Stocks that shine brightly making new highs attracting the attention of the herd (me) to later burn their oil and start fading, but after a short pause they rise from their ashes glowing as brightly as a red giant, devouring not planets but grubstakes, creating what some chartists (me) call "Double Tops" to later experience a fast collapse toward the reversion to the mean, being was of the most painful processes in trading.

I wonder how many grubstakes have been drilled due to this beautiful glow fueled by hope, the most human of all emotions.

BTW, my cat died today, his name was Boro (after the Triboro Bridge) a kidney failure turned a young, chubby and happy cat into a pathetic creature. I had no choice but to pull the trigger and ask the doctor to end his misery... he was a good guy, that's why it hurts so badly... good luck my friend.

2-Jun-2006
Does Population Growth Threaten Living Standards, by Donald J. Boudreaux

To Editor of The Christian Science Monitor:

Jeffrey Shaffer asserts that growing population inevitably threatens to lower individual living standards ("Overcrowding at the gas pump," June 2). Baloney.

Are Americans today poorer than we were, say, in 1800? According to Mr. Shaffer's logic, we should be. Back then U.S. population was 5.2 million; today it's 57 times larger at nearly 300 million. And the world's population now is more than six times larger. Yet, of course, our standard of living - along with that of everyone living in open, market societies - is today inexpressibly higher. The reason is that free markets ensure that, for all that we consume, we produce even more.

Steve Ellison responds:

In a free market, the greater the population, the more customers there are, and the more business flourishes and creates wealth. Network effects in which services such as eBay become more valuable as more people use them have been well documented. I would argue that population shrinkage is a greater threat to living standards than population growth. The potential for worldwide population decline is a significant difference between the 21st century and the 20th, one that might plausibly hold investment returns below the 1,000,000%-plus of the previous century.

2-Jun-2006
Non-parametric Fishin' Bragging Boards, by J.T. Holley

I was trying to practice and learn the Fisher test after West Coast Spec told me the other day that it was easier than I anticipated and I was making things hard on myself.

I brainstormed to come up with something that would fit into a two X two test instead of the usual suspects that I see in texts. I then thought of the Bragging Boards that are quite frequent in bait shops and tackle stores. A recent trip to the Outer Banks of N.C. brought this about. These boards have nice size Polaroid shots of person that caught fish, fish in hand, where they caught it and what the bait was. My Fisher table (for practice) had Lake, River and Live Bait, Artificial. I made up the data for the sake of learning. I'll declare that my non-parametric learning is progressing, especially when I can relate it to fishing!

This though took me to the conclusions of the overall thought. Braggin' Boards! What a wonderful tool for the avid fisherman to use. Although the pictures are usually dated and fading they almost always have the name of the lake or river where the fish was nabbed! Most of the time the date and time the fish was caught and the "BAIT" used is also present on the border of the picture. Growing up I knew that the most recent dates and the bait were the most important things and were promising pieces of data to know. This is a fine example of where Hubris can lead to an edge being lost. My PaPa and I had a standing inside joke we used when passing fellow fisherman that asked the inevitable questions "whatcha using to catch those fish?", the answer was always "Corn", then we'd laugh further down the river bank. We never showed open stringer's or full kreel's, always keeping "ever changin'" fishing holes a secret. I guarantee you my tail would've got a whooping if my smiling face and a nice fat fish were ever placard on the wall at the local bait shop! I would've rather had my PaPa seen a mugshot of me. Fishing secrets are to be well protected, no room for hubris. It just leads to a downfall.

This led me to think of the greater Trading Ecosystem and its Bragging Boards. No wonder Rentec, D.E. Shaw, and the likes try to keep on the low down. Why would they want to have their faces smiling ear to ear on a Polaroid with piles of money sitting around after a big months return? They can't afford to let go of the edge. The mystique also attracts more assets, you can ask any Fishing Guide this one. If they were to post polaroids and show "winning confirmations" we could gather the same info about "Bait". Think of all of those messages on Elite Trader! That can definitely be a Bragging Board along with some of the other periodicals across the Globe. They don't want you to know there names ie. Anonymous login's. The Bragging Boards are there but just like the fishing ones it only leads to loss of edge and a weakened state. The other example of a speculative Bragging Board are the advertisements of "How I turned 10,000 grand into 1,000,000 and so can you" but we all know that trap and deception. Maybe some of those fishing pictures were equally deceptive and had false info?

Anyone know anymore examples of Speculative Bragging Boards?

1-Jun-2006
Wave Talk from surfer David Nichols

Hi Vic,

I was reading through your site again, and I'm really enjoying your learned style and far-ranging interests.

It's so interesting you work with physicists, and surfers (I'm a surfer too).

The most fruitful line of thought in this regard is to ruminate on the way nature converts the swirling storm winds into well-organized swells, which then travel great distances to unleash their energy on distant shores. The path of swells -- and the shape and size of the breaking waves they will eventually become -- can be known well ahead of time, with great precision. There are very similar processes in financial markets!

1-Jun-2006
Reaction to Losses, from Jason Schroeder

When I act inappropriately with respect to a loss, the little voice inside screams out asking why do I hate myself so much? why do I hate my trading account?

I have no answer but I still am halted from acting.

Janice Dorn replies:

You have no answer because you are paralyzed by fear and self-loathing, The answer is too painful to hear, so you prefer to lie to yourself via the sound of silence. No one wants to deal with toxic shame. The answer lies in responding, not reacting.

One must learn to take personal responsibility for all actions, including those against oneself. Once you see that you are the problem, you know that you are the solution.

Once you accept that you are not perfect, that you are human, frail and fallible, you become more comfortable in your own skin.

That is a good start.

Forgive yourself, be gentle with yourself, and move on.

1-Jun-2006
Market Roller Coaster, from Martin Lindkvist

The number of non-institutional trades on the Stockholm exchange rose 31% in May compared to April, to on average 53,000 trades per day. Small speculators sold heavily in mining and oil stocks, and hundreds of thousands of people saving in the stock market, who seldom look at the market, sold out according to online brokerage Avanza, but then started buying back a few days later.

This then could partly explain the roller coaster market of the last weeks. Yes, it's a global phenomenon, but we have had some really nasty rides, that far outstretch some of the other bigger markets as well as markets of comparable size. For example, look at yesterday's 3.5% drop in the morning followed by 4.5% upside into the close. And there are very sudden swings, like this morning when we first went up 0.5% within 10 minutes, and then 20 minutes later we had lost more than 1.5%. It's like the air is being sucked out of the market. Perhaps small traders are making things worse, but it seems to me that even the big traders are having the jitters right now. And yes, I too asked for more volatility earlier this spring. I really should have been more careful with my wishes.

Letters to the Editors: Archive