Letters to the Editors October '05   Write to us at: (not clickable). Please include your full name, and omit attachments

Letters to the Editors Competition

10/31/2005
A letter on Refco from P. M.

Dear Victor

Sorry to hear about the recent nonsense in the news re: Refco and your past troubles. You are one of the few who are truly transparent, how could the chairman of an educational website not be. It makes me such the happier person that being wise really helps you win in life, and learning from mistakes build character. I've learned that from you as much as anyone. And if worse comes to worst, sue the living crap out of them.

I  know your (and my own) fascination with round numbers and the markets, I wonder what you think the effect, if any, of the fake Dr.'s next up-dosage to the round number of 4% will have on the markets. Perhaps this may be why the 1200 round number has been dancing to and fro so much this year.

Best regards, P. M.

10/30/2005
J.P. Highland on EdSpec

I've just completed (for the first time) the Education of a Speculator and the only word I have found to describe it is WOW!

These are some of the reviews the book got in Amazon, these are the reviews from people that expected to find "extraordinary" trading secrets like Buy on the 89-high breakout and sell in the 13-day low , and make money effortless.

About 95 percent of today s racegoers arrive at their selections using exactly the same information. With the Daily Racing Form in one hand and the track program in the other arriving at the same superficial conclusions What the public doesn t realize is that a professional horse racing analyst generally spends 16 hours a day to the racetrack

Two conclusions came to my mind, among many, that I can t expect to be successful using the same tools everyone does, I can t expect to be successful using the tools most commonly used by the people, a MACD and moving averages (these are the studies most commonly requested in Prophet.net).

To be successful I have to understand the big picture through the complicated relationship between markets incredibly described in Connections to Monitor , that chapter is orgasmic! and by taking the other side of the trade of the guy seated on his ass thinking he can be as smart as Warren Buffy. Success at the markets is not an easy task, it demands a lot of effort and homework so I better start now.

You also touched me deeply when you relate the death of your Dad, which is very similar to my Dad s who I worshiped above all.

Before I proceed to Daily Speculations . I m going to take a break from you. I m going to read something from Nicholas Darvas.

Thank you very much for such a great book!

10/28/2005
A Reader's Suggestion

I love your sites and your books, and just got my boss to read "Secrets of Professional Turf Betting". Keep up the good work! I think a great addition to your site would be simple tutorials of how you actually test out ideas; i.e., what software you use, how you double check your conclusions, etc.

Jeff Emanuel

10/27/2005
Nassim Taleb on Refco

Hi there. I just emerged from a series of trips and saw the Refco story. It seems to me that financial journalists are very talented at proving that their understanding of simple events is below the minimum required to pass an elementary critical thinking test. They are almost all incompetent at handling information (but not necessarily dangerous) and I suggest that you just ignore them.  You yourself boasted only reading the National Enquirer! When most journalists write about a topic they are far more descriptive of journalism itself than the subject matter they think they are dealing with. It is much more fun to look at the bulk of financial journalists (or bulletin board activists) as a lower form of intellectual life and use them for just entertainment. I confess that this second-order reading has worked for me.

Best, Nassim

10/27/2005
Hoodoos

... speaking of cycles, Bacon's book was an excellent recommendation.  I've recommended it to a few other people, and the comments have been universally positive.  Of all the topics you covered in your book though, I like the one about the hoodoo best.  For a while I did not believe in that idea, but after having run into 2 people who personified "bad luck," I've changed my mind.  One of them in particular had infectious bad luck.  It was scary.

From an English Reader

The Chair responds:

You allude to some information you've heard about draw-downs and booms in the  performance of hedge funds and how it shouldn't be bothersome if you go by the numbers. I would caution you that there are cycles in what works and what doesn't work. Vic

10/26/2005
Our Last Contest Winner Makes Rounds of Europe's Coffee Houses!

Great coffee. I went to Romania and Camden Maine. I am going to Hungary and London next --I will be presenting a paper against prediction & the "Central Planner".

The check arrived. Thanks a lot. I am thinking of framing it (I am still wondering which charity I can send it to).

-- Nassim Nicholas Taleb

10/26/2005
S&P Futures and the Cash Markets

Dear Victor.

Concerning Hany Saad's claim that buying the S&P futures could not be used to support the cash, I ignored that claim when it was first made because he was arguing with John Embry and others, not with me. I had said nothing about that issue, and, frankly, had no opinion about it. My view was that if I had the power to create money out of thin air, it would be a no brainer for me to support the stock market, if I so desired, by simply buying the stock of the companies that were major components of the averages. Hence even though I would hesitate  to attribute brains to any central banker, I felt confident they could hold up the stock market, if they chose to do so.

Tonight, however, I spent a few minutes thinking about John Embry's claim that buying S&P futures could be used to support the cash, and it quickly became obvious that he is correct. Here is why: the value of an S&P futures contract is, by definition, $250 times the value of the S&P 500 index; hence its value is utterly dependent on prices set in the cash market. However, buying of S&P futures gives rise to parallel buying in the cash market. The reason: there must be two sides to every transaction. For every buyer of an S&P contract, there must be a seller. Thus if, for example, 10,000 market orders to buy 100 lots flow into the market from dummy accounts controlled by the PPT, market makers at the CME must take the other side - go short - to the tune of 1 million lots. If those are naked shorts, meaning that the market making firms do not actually hedge themselves by purchasing the underlying stocks in the cash market, they will soon find themselves vulnerable to being wiped out by an up-move consisting of a mere twitch in the index. Hence they must, of necessity, hedge their shorts in the cash market. And that means massive buying will pour into the cash market in response to massive buying of the S&P futures.

If Hany Saad is a floor trader at the CME, as you say, then perhaps he is unaware that managers at the firm which employs him monitor their net position vis-a-vis the S&P futures and, when matters become unbalanced, are in the habit of hedging in the cash market. Or, alternatively, perhaps managers at the firm which employs Hany Saad are howlingly irrational; but if they are, they are an exception to the rule. Managers at a typical firm would be guaranteed  to keep a close eye on their net position in the markets, even if they neglected to inform their lower-level employees of such activities. Routinely hedging off such risks would be a necessity of the firm's survival.

Bottom line: buying of S&P futures most assuredly would be a way for the government  to support the cash market, Hany Saad to the contrary notwithstanding.

Mitchell Jones

10/26/2005
Mark Benjamin on Pollock's fractal Paintings

I recently found an article describing the fractal nature of Jackson Pollock's paintings. The website of R.P. Taylor, University of Oregon, contains a lot of related info.

I also found a specific article that further details a study that was conducted by students trying to create paintings that were also fractal. What's interesting is that the students were unable to create paintings that were measurably fractal in nature. Out of 37 students attempting to create paintings with fractal content 100% failed, as opposed to 100% success rate for all Pollock paintings tested.

Recently there was a trove of 32 supposed Pollock paintings discovered in a storage unit in New York. Their authenticity is disputed. Could the techniques used to determine that his painting were fractal be used to authenticate the recently found paintings?

Can the techniques used be applied to counting? If markets in their normal state are also fractal, would it be possible to identify periods where manipulation or artificial systems ala Jim Sogi, are causing deviation from a fractal state?

Mark Benjamin

10/25/2005
Kudos

After reading Vic's postings this weekend re: WSJ , I wanted to thank him again for the privilege of allowing the SpecList members a birds eye view into his thought processes, methods and tools. It is a testament to his skills and character that he has the time and inclination to help others improve while running a fund in a time pressured, supremely competitive arena. I only wish more SLs would appreciate that.

My meager participation has also kept me sane and "in the loop" on capital market developments and, for that, I can not be more thankful.

10/23/2005
A Thank-You Note

Victor,

I trade stocks and futures and I have learned from you a lot, mainly how to think for myself. I have made good profits using ideas I got from reading your posts.

I am the CEO of my company -- telecommunications -- and I do trade and invest in two separate accounts. With currencies do you trade them short-intermediate or long term and what do you base your trades on? I started moving away from charts after reading your articles. I am doing well in picking stocks with some of the ideas I picked from you, but with currencies because I traded them shorter term, other than the charts I do not have any method of entry or exit.

Name withheld

10/23/2005
A letter from Arizona

Dr. Niederhoffer,

After perusing the website for awhile today I realized that much has occurred in your life regarding Refco, etc. I had no idea. I now realize that you are extremely busy and dealing with bigger fish. Please, please disregard my last email and don't worry about responding. As I don't read much news and I watch t.v. probably once a month, I really had no idea that you were going through all this. It is terrible. Anyone who reads your books can know your heart and what kind of man you are. Furthermore, you have always set aside time to respond to my emails and teach me, even though you don't know me from Adam. I will always be grateful for this. After realizing the lengthy email I sent you and that it would require much effort and some time on your behalf to respond, I know it was unfair of me. I am sorry.

I hope all goes well with you and yours. Know that there is someone in Arizona (me), even though we have never met, that thinks highly of you.

Kind regards, David

10/22/2005
The Wall Street Journal's Tarring Victor Niederhoffer with the Refco Brush, from a Hedge Fund Manager

Sadly, the American media has once again looked for scapegoats to "pin the tail on the donkey"...the kind of blood sport that the media revels in.

A bunch of young reporters, some hardly born when this industry was built by men like Victor, have once again revisited the past to try to connect a good honest man with the malfeasance at Refco.

Anyone who has ever traded or managed money with the goal of significantly and consistently outperforming the indexes or the log normal mean of investors, in this pursuit of excellence will and can make a miscalculation on macro and micro investing. There is nothing wrong with being wrong. It's not the mistakes we make as hedge fund managers, it's how we deal with them and the courage we have to never give up, never never never....

In World War II, the American Navy was seriously wounded at Pearl Harbor, and yet we never allowed our mistakes to stop us from recovery and eventual victory.

So tonight when I read the first page of tomorrow's Wall Street Journal, and discovered Victor's picture and the analog created by these reporters that connected Victor to Refco's problems, I was disgusted.

10/22/2005
Everything You Read in the Newspapers Is Absolutely True, Except for that Rare Story of Which You Happen to Have First-Hand Knowledge, by Tom Ryan

The sentence of pillory is alive and well today except it takes the form of slanderous articles rather than stones.

In the Patrick O'Brian's novel Reverse of the Medal, Jack Aubrey, the greatest fighting captain in naval history, has been conned into taking the fall for an insider trading scandal involving his own father. Aubrey is tried; confident in the English judicial system, he attempts to mount his own defense and refuses to turn against his dad. He is sentenced to the pillory. He goes there and 10,000 midshipmen and officers, all at desperate peril to their careers, crowd the street. They refuse to allow the stone throwers to get near him. When the time comes for the stone-throwing the words ring out, "Off with the hats," and immense cheering fills the street.

Attempting to answer the question about the kind of mind that constantly focuses on the glass being half empty, I have found that people will always pay more for doomsday than optimism. This seems cynical -- but I would call it a relic of our hunter/gatherer past where daily survival was less assured than today. It is the kind of social status-leveling that tribal people often want to see -- a society where no one person stands out from any other, where second-hand distributors of information are king, and where anyone's insecurities can be assuaged by the view that if you don't get what you want, there is nothing to worry about as no one else will be allowed to get it either. -- Victor Niederhoffer

The media is the message. -- Marshall McLuhan

The advertisement is the most truthful part of a newspaper. -- Thomas Jefferson

10/19/2005
The Greatness of the Late Jim Lorie

Dear Dr. Niederhoffer:

I just wanted to drop a quick line and compliment you on your post regarding Jim Lorie's "Government and Advertising: The Heavy Hand of Benevolence." After reading the quote you posted, the first thought which immediately came to mind was Refco's bankruptcy filing today. The failure of regulators to "protect" investors from Refco's problems prior to its IPO only accentuates Dr. Lorie's accurate and elegant comment on free markets serving the public good. One can only hope with time that private firms will step up and provide investors with some "protection" (IPO insurance, maybe?) from bad IPOs that government regulators are either ill-equipped or under-staffed to deal with.

One other thought which came to mind is this: with all the media focus on the failure of Refco, why hasn't there been more attention paid to the lead underwriters of Refco's IPO, CS First Boston and Goldman Sachs? If anybody should have offered their investors protection, it should have begun with both GS and CSFB. The failure of both firms to act on behalf of investors' interests in the Refco IPO, however, should, in my opinion, have very little, if any, effect on their ability to bring future IPOs to market. I guess George Barr McCutcheon was right when he said, "...a fool and his money are soon parted."

Here's hoping you and your firm are making profitable trades in this market! Take care, and keep up the great work.

Sincerely,

Aaron Koral

Dear Ms. Kenner and Dr. Niederhoffer,

The following is an shameful attempt to win letter of the month, but I swear every word is true.

I have been involved in the financial markets for about 15 years and have traded significant capital as a proprietary trader for the large banks on a "discretionary" basis for the last 10 years. Something started bothering me about the huge variability of my returns in about 1998. This coincided with my discovery of the likes of Victor Niederhoffer and James Simmons (Renaissance Technologies).

I decided at that point to embrace a statistical approach and have absorbed the works of Stigler, Niederhoffer et al., in addition to various works on multivariate comparison analysis -- so in a sense I am still "catching up."

Now to the point -- My beautiful wife has suffered through long hours/days/weeks of me buried in statistical texts and regaling her with tales of random this and non-random that. So it was that I prepared a scatter diagram for my wife (I know, I know!!) showing a negative relationship between my wife buying wildly expensive shoes and the "overplus" in our accounts. Well, the very next day, lying on my pillow, was another scatter diagram showing a PERFECT negative correlation (r= -1 with many observations) between my questioning of my wife's shoe buying habits and, ahem, marital intimacy that evening.

Her shoe collection has resumed its upward advance...................

Regards,

Shane James

10/18/2005
Markets React to Old News

Dear Victor and Laurel,

It seemed ridiculous that the three staged announcements could have caused the decline because this was a repetition after repetition of what had already been announced. The market isn't supposed to move based on historical events but on changes in anticipation

In my experience, the bond markets have a bad habit of reacting to old information.  My favorite example was a speech by the ECB president, (then, and now, Mr. Trichet), that was given outside European trading hours, (O/N in NY).  I read the speech, and thought one passage in particular would be interpreted as 'hawkish', perhaps resulting in a lower open for EGBs.  They opened little changed.  The speech was delivered again that day, during European hours.  When the 'hawkish' passage was quoted on the wires, EGBs sold off, around 1bp in the 5y. It was a small move, and a short-lived one, but enough to affect the P&L of a short-term trader, as I was at that time.

Measuring the informational content of events is an interesting idea. The problem with doing so for equity earnings (imo) is that the time of release is generally not known with certainty (not true of economic events).

Regards, Mike

10/13/2005
Proposition, from Seb Pritchard

Proposition for the floor: "This House believes that the Triumphal Trio are the ultimate trend-followers." Discuss.

10/12/2005
A letter on Checkers from Alan Millhone

Hello Mr. Niederhoffer:

I am more than pleased to see you listing more of Tom's proverbs on your website.  People wrongly see Chess as a much more difficult game than Checkers, but you and I know better.  I am sure GM Davies would cringe to hear such talk .  Tinsley played Chess in Columbus at first at OSU and later switched for Checkers.  Marion could play both very well and he said once that Checkers was immeasurably more difficult than Chess.  This past week-end at the Richmond, Ky, Tournament Don Brattin told me it takes  at least five years of serious Checker study to realize how little  we actually know about the game !  Both games are superb for the mind .  Mr. Earl Harvell  of Texas played this past week-end. He is 92 and his mind is very sharp  as his play indicated over the week-end.  I only wish we had a investor of note in Checkers......................

Regards, Alan

10/11/2005
A Letter on Bridges, from Eldon Brown

Hi,

I've written once before as I enjoy your site, and yes, have a copy of PracSpec as proof of my paid subscription to it, it there was to be one.

In James's study of bridges I think he neglected to mention torsional forces. One example of what happens when you do neglect this was the Tacoman Narrows Bridge with the famous video of it doing the twist that is mandatory viewing for most engineering students. The collapse of this bridge also may add the dimension of critical failures and natural frequencies from outside forces to the discussion on the bridge like characteristics of markets.

10/09/2005
Primal Scream, from Anthony J. Tadlock

Dear Chair et al;

I have been reading dailyspeculations.com for the last 6 months or so, having found it doing an internet search for Niederhoffer -- said internet search prompted by reading "Practical Speculation" and "Education of a Speculator". I trade my own account (with advice from a pretty good broker). Primarily, I tend towards an optimistic Buy and Hold strategy with short-term trades done around my positions. As of 9/30/05 I am up (for the calendar year) 7.5% including dividends, interest and brokers fees.

I am primarily writing to give my impressions of Primal Scream (or as I refer to him to my wife "the crazy man") and the popularity of his show. To start, the show is entertaining - in a World Wrestling Federation kind of way. I remember that Gorgeous George was reported to be a psychologist who thought his wrestling persona would act as a catharsis for the common man. Many small investors are terrified of the market and crave tips, advice and reassurance from an authority figure. Scream gives them all of this in an easily digested package. There is the daily battle with the inert chair as well. I am not sure, but it seems that this battle started soon after mention of Scream in DailySpeculations, which has interesting implications.

Perhaps the most interesting thing is watch the tape of the after-hours trades during the 1st half hour of the show. I saw one show which was a rerun, in which the stocks mentioned all started active trading after hours. This show was about "boomer" medical stocks and MRK started going up even though for the last week it had been down due the Vioxx verdict in Texas. Scream has 180,000 watchers; I don't know of a way to calculate how much money the people investing on Scream's tips have to put in the market or the net effect of his popularity has on the broad market, although I'm sure advertisers have a rough guess. The trades I see after hours which coincide with his picks are generally 100-300 shares. Some viewers must also be taking his advice to place limit orders which may or may not be being filled during regular trading. At any rate, assuming that there is enough volume to affect the market enough to get trend followers chasing the stocks as well, the market is not being efficient, rational or random.

10/07/2005
A Letter on Fed and Greenspan Bashing, from Barry Gitarts

So quick to bash the central banker, but what do you suggest he do? Would it be better if Greenspan and the governors pursued the same course of action without communicating to the public?

10/04/2005
A Letter on "Delay" from Aaron Koral

Dear Dr. Niederhoffer:

I just wanted to drop a quick line regarding Scott Brooks' pondering the question of "The Economic and Investment Implications of Delay". For me, I used to be "impatient" at times when it came to investing. It comes from my father, who could be pretty impatient too. My old man used to be the guy that wanted his microwave oven to prepare food yesterday. Anyway, as my old man matured, he became much more patient related to both his family and his finances.

I think age makes one more patient because, as Scott said, patience comes with experience. For me, I used to pull the trigger on trades (buys only) without doing any research and bought solely on price (i.e , between $5 and $10) then proceeded to "lose my shirt" accordin= gly (my apologies for the bad cliche) on the stocks I "bought". Time (and a few losses) will quickly wise up any trader looking to profit from what the market mistress will give them. Now when I buy a stock, a number of factors come into my decision making:

Now when I buy, I look at those factors above patiently and if the price is right, I buy with "both hands and feet." I'm still impatient, though -- I always want the stocks I buy to make their 5% moves today, but I can be patient because I've done just enough research to understand what I buy and, more importantly, why I've bought a stock. I'm still learing the ropes on specs, but as time goes on, I'll get there "...with just a little patience," as Axl Rose from Guns N Roses used to sing.

10/3/2005
A Letter on Plunge Protection Team, by B.G.

The purpose of a plunge protection team (PPT) would be redundant and pointless because it is no secret that the fed has the ability to intervene in markets, as it has done during the 1987 crash when they created liquidity buying bonds.

Letters to the Editor: Archive