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01/18/2006
Thoughts on Markets Inspired by On the Origin of Species, by Victor Niederhoffer

  1. While acknowledging that everything Stephen Gould or Niles Eldredge have ever written about evolution was a disguised attempt at egalitarianism, cultural relativism, and liberal ballyhoo, they are considered the main current leaders of the theory of punctuated equilibrium, the idea that the change in species and the earth was due to a series of cataclysmic changes, such as earthquakes and large meteorites hitting the earth. This neotech version of creationism attributes any current findings of fossils or life at a time to "a temporarily static result of deep seated, intense and episodically constant violent wrenchings of sediments quietly deposited on the sea floor and transformed into the slopes of prodigious mountains". A more technical discussion of it is contained in Wesley Elsberry's discussion.

    The theory has always seemed to describe everything and predict nothing like so much of the mumbo in our field, but nevertheless there would seem to be some cardinal events that have changed forever markets that create a completely different kind of atmosphere and regularities in our field. The key ones to me appear to be the 1987 crash, the Long Term Credit fall of 1988, the 9-11 bombing, the two Iraq wars, the fall of Enron, the public offering of Google, the reduction in dividend and capital gains taxes.

    Any poor specinvestors who don't change their counting and cycles a la Bacon in the light of these events are doomed to failure.

  2. Doing small things: Eldredge reports that Jesse Brodie, the Darwin children's nurse and a former employee of Thackeray, once saw Darwin just looking for an hour at an anthill. She said "What a pity it is that Darwin unlike Thackeray had nothing to do". This brings to mind Nock's essay Snoring as a Fine Art and the patter song in the movie version of Showboat "I don't do nothing". I often stare at the screen the way Darwin looked at the anthill. And then I make observations on the back of an envelope until such time as the observations might be tested with a theory and a prediction.

George Zachar responds:

Not only is there a long and growing list of metaphorical asteroids striking the global capital markets, but the rate of such impacts is increasing.

This accelerated bombardment of cycle-altering events is taking place concurrent with a dramatic expansion of the speculative playing field, perhaps reminiscent of the vistas opened to European capital with the discovery of the New World. The new horizons are geographic (China et. al), technological (nanotech, etc.), and financial (such as credit swaps).

One could make the case that no greater speculative opportunity matrix has ever existed.

Prof. Gordon Haave replies:

Some possible additions:

  1. The deregulation of brokerage commissions and the resulting rise of the discount broker.
  2. The launch of Vanguard and the rise of index funds.
  3. The widespread use of the internet, making information gathering and trading more efficient.

Alston Mabry responds:

Retrospective, but nonetheless:

In November 1999, the Vanguard S&P 500 Index fund topped $100B in assets. The average investor had indeed gotten wise to the whole "active management" game.

VFINX
adj close Nov 99: 116.80
Jan 13, 2006:  118.62
+1.56%

VL Arithmetic
adj close Nov 99: 985.58
Jan 13, 2006:  1993.50
+102.27% 

What was it Robert Bacon said about the form moving away from the public?

Steven Leslie responds:

Your point number two reminds me how Jerry Kramer described Lombardi's attention to detail in running the famous Green Bay sweep. How they would practice it so exhaustively that it became so natural and second nature that opponents said they saw it coming but they still could not stop it.

How Ted Williams would lift his bat and knew that it was an ounce off in weight. Or how James Joyce labored all day over where he would place a comma in a sentence. Or how Vic Niederhoffer said that his greatest skill was his ability to concentrate and focus on the screen in front of him one time for 52 straight hours without sleep.

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