Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.

 

Home

Write to us at: (address is not clickable)

11/21/2004
The Most Dangerous Man on Wall Street, by Joe Hughes

T'was several lifetimes ago, as I have died many a financial death since: I was befriended by an amour's father. He was a very kind, generous and humane man. From a modest background, he had escaped farm life in the Midwest; worked hard; fortune smiled upon him. And at one point was the Chairman of the NASD. His daughter was of nuptial age and he was eager to get to know this new young buck of a trader taking up with his baby. We shared many a meal in some of San Francisco's finer establishments where one would find the city's financial gurus and "in the knows."

At the time, I was a twenty-something fixed income trader, street-hardened in a guttersnipe sort of way. It was early on in our lunch set, that this demi-denizen of Wall Street, some 30 years my senior, decided to check my intellect and savvy.

"So who's the most dangerous man on Wall Street?," he parried between bites of petrale.

"That's easy," I replied in my typical shoot-from-the-hip style. And honestly, I don't remember who I put forth, Ace Greenberg, Lew Glucksman, Sam Zell; could've been any one of fifty or so superstars. It didn't matter. I was wrong.

"The guy sitting in the corner, scratching his nuts, with kids to feed and a mortgage payment."

Touche.

The parallel, and a question many simply do not understand, ask , or answer, is:

What business are we in?

The answer is, the business of making money. And your trading should expand like a logic tree from that question each and every step of the way. A failing to properly answer this simple inquiry, at any point, will most certainly lead to failure. Understanding not only the business of your market, the business of your capital management, the business of your strategy and analysis, will all undoubtedly lead to doom if not understood. Even full and complete knowledge will not guarantee success, only increase the probability that there can be a successful/profitable outcome.

Indulge me a small digression at this juncture for purposes of illustration. At the time, I was a young turk trader at a prop shop, charged with developing an axe in the fledgling discount mortgage back business. The nut scratching conversation was not wasted on me. If a guy with kids and a mortgage is the most dangerous guy on the street, hell, I'm single, white, and legally free with a huge credit line and no customers! I've died and gone to heaven. I can become twice as dangerous as that guy scratching his balls in the corner went my reasoning. Hell I'll outwork him. I loved the markets. Sure beat the minor league hockey, better hours, better girls, and for the most part, better money and a lot less painful physically.

So I more or less moved into my office and set about learning. I studied successful traders. My hero was Marc Rich. (lesson: remember what business you are in). I studied trading methodologies, TA, included. It was at this time I first came across Vic's work. And I decided  that I didn't have the capital commitment to go the route of my trading hero at the time, and the next best fit for my strategy was a combination of TA and statistics to support my positions, hedges and their theories. It worked well for me. Gave me the comfort I needed to sleep at night sorta kinda. (as there was not any type of exact method of hedging discount MBS securities and hedges at best were a guess estimate.) The point being, I was comfortable with my knowledge. I knew my business and how I was to set about making money. It worked very well, until one day it didn't. The Fed made a surprise rate hike, I believe it was on a Friday, if memory serves, the hedges didn't perform as well as expected. Instant hubris. With lots of zeros. But I knew my business.

The point of the digression isn't group therapy for a previous life's nightmare. More to address points brought out in the TA Confession.

"Where are the customer's yachts?"

Not for quite sometime have "upstairs" firms truly traded for their "own accounts". They are not in the business of taking risk. They are in the business of "brokering" risk. Matching orders, providing ideas that generate those orders. They usually only take positions in areas they have an edge, read order flow. Order flow has turned many an upstairs trader into a "rocket scientist". Especially if an upstairs trader understands the personalities that travel "his pad".

M & A and new issues present far more risk less opportunities to generate revenue. The big houses understand what business they are in. It is not one of taking much risk any longer. It is one of the reasons there are so many hedge funds, most of the best trading talent has left to be allowed to trade once again. (Lesson: Rread again, what business am I in? Traders make more money taking no salary and risk)

To address the business practices of TC Net and the "professionals", and it's a practice I oft thought that new golf teaching pros use to keep students coming back, give Mrs. Schwartz a bit of truth, and some more the next time until the book gets fat. When one should rightly tell Mrs. Schwartz, forget it, you have no talent for this, put the golf clubs in the garage next to all your old trading sheets. Lesson again, what business are they in?

In the methodologies, analysis, identification, interpretation and tools in the hands of tools or fools department. I have been in the markets way too long to question, criticize or pooh-pooh any successful speculators ways. Now this does not mean I would necessarily ascribe to them. What's the bottom line? Does it work for them? That is what matters. Not what I think, they should give a tic less, and the good ones don't care what anyone thinks of their methodologies. Now this does not mean I haven't seen severe cases of analysis paralysis, or traders unable to react because of too much information at hand. I'm not that old, but I started in this business in the days of hand posting, and I am of the opinion that the traders were better then, it was harder, markets were smaller, all the personalities knew each other. But many were very good without all the tools. And that is the thing of it, all the analysis is just that, it's all rear view mirror, even the statistics, walk forward neural networks included. That being said, it comes down to what works for you. How is it that one person can look at the ink blot and see a fire breathing dragon and another a lesbian menage a trois? Or is it one in the same?

The tools are just that tools. Used for identification, interpretation, entry and exit strategies, and the statistical probability that the outcome will be as anticipated. If you are using fundamental analysis to determine the best entry and exit from a position and are successful with it, God love you. I never could. My pad was much too big to keep track of that even upstairs when I had to hang a number on say 250M Genetech AON, State of Whisky Teachers, probably gets bigger, hasn't been shopped. (yeah right) My first look was to TA charts for support, second would be to my orders, and third would be how bad do we want the biz Mr. Managing Director sir? This does not mean for one second I wasn't aware that they were to report earnings the next morning. Certainly not. Again, the point being, is different tools are for different strategies, different tools different markets and issues. There is NO real right or wrong way, just right or wrong application and interpretation. But I can assure you, if one is not having success with a certain method, or series of indicators, the answer most probably does not lie in obtaining a bigger hammer. But most likely in asking oneself the question, "What business am I in?"

As the answers to the question reveal themselves, and one develops a degree of confidence and it translates into successful transactions a diligent watch must be kept. As the nature of the markets is change, the very nature of business itself is change. Sometimes large sometimes small. But all too frequently enough to skew our anticipated results. And as is the nature of markets and certain trades, they tend to die. Or sometimes a certain method of analysis is successful not because of its brilliance, but its majority. It is also the nature of everything traded in the world to have a benchmark of what it prices itself off of. This relationship can be from when the vehicle was introduced, or as in the case of hedges, from an item it best correlated to. These elements are constantly changing. And I can think of no better example of when I began in the industry when stocks were priced off of dividend yield.

Nothing is new, nothing stays exactly the same. What business am I in?