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9/09/2005
Cane Investing, by Victor Niederhoffer

Just nine trading days ago, at 2 a.m. EST Monday, Aug. 29, the market was at 1192 -- down 68 points, about  5% from a high of 1260 set 12 trading days before on Wednesday, Aug 10. Such a decline brings to mind the many times that old investors have taken out their canes to hobble down to Wall Street, where they bought stocks to the full extent of their bank balances, depositing the overplus when they sold a bit later in sound real estate. Readers were urged to follow the old investors' example in many 19th-century books, including Clews' Fifty Years in Wall Street. It sounds like good advice, but is it true? We ran some tests from year-end 1899 with daily Dow Jones Industrials prices to test it.

Here's a typical result. The table shows what follows a decline of more than 10% over a five-day period , close to close.

Date       5.Day.Move    Price   Price[t+200] Return
   5/9/1901  -10.4%      67.38      65.27      -3.1%
 12/12/1904  -10.2%      65.77      80.92      23.0%
  3/14/1907  -11.9%      76.23      58.65     -23.1%
  7/30/1914  -11.3%      71.42      89.90      25.9%
  5/10/1915  -10.8%      62.06      94.35      52.0%
   2/2/1917  -10.6%      87.01      72.95     -16.2%
 10/24/1929  -12.4%     299.47      221.08    -26.2%
  6/17/1930  -11.2%     228.57      167.03    -26.9%
 12/16/1930  -10.8%     157.51      96.61     -38.7%
  9/18/1931  -10.3%     115.08      41.22     -64.2%
 12/14/1931  -14.3%      77.22      71.53      -7.4%
   4/6/1932  -13.9%      66.46      61.46      -7.5%
  6/27/1932  -10.2%      42.93      72.64      69.2%
  9/14/1932  -17.6%      65.88      105.04     59.4%
 11/30/1932  -10.8%      56.35      93.18      65.4%
  2/27/1933  -11.0%      50.16      98.87      97.1%
  7/21/1933  -15.5%      88.71      93.91      5.9%
 10/19/1933  -14.6%      84.38      88.97      5.4%
  7/26/1934  -12.1%      85.51      116.58     36.3%
 10/18/1937  -12.7%     125.73      141.73     12.7%
  3/28/1938  -10.8%     107.25      148.26     38.2%
  5/14/1940  -13.2%     128.27      120.88     -5.8%
  5/28/1962  -11.0%     576.93      673.73     16.8%
 10/19/1987  -29.6%     1738.74    2134.07     22.7%
  8/31/1998  -12.0%     7539.06    10490.51    39.1%
  9/20/2001  -12.8%     8376.21    9096.09     8.6%

                                        Mean  13.8%                            

Note that since 1932, the average move was about 40% in the next 200 trading days, with one decline of 6% out of 14 occurrences. Mr. Tom Downing and I systematically looked at numerous other definitions of a panic, varying the extent of the decline and the duration--- for example, a decline of 5% in three days. The results are qualitatively similar. Much regret and potential lodging on the Bowery in the first third of the 20th century, and much valuable real estate stashed away for the rainy days thereafter. All things considered, the old-time advice on what to do in panics holds up quite well.

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