What We Can Learn from Shells, by Victor Niederhoffer
Shells and mollusks have been around for 500 million years, and they are the second most numerous family of all in nature. The shell provides the protection and stability for relatively slow moving species and how it evolved and its function would seem to provide some guidelines for survival and success stories in markets and life.
The book Shells by Cheryl Claassen is very helpful in understanding the uses and abuses of shell research. Her passage on predation as a contest between prey and predator among shells makes you particularly skittish about the direct approach to investments. Shells change their colors, their size, their opening thickness and space, their curvature, their carried baggage, their depth, their shape and their speed, all to avoid being swallowed, enveloped, suffocated, trapped, drilled, thrown to the ground (the otter is a master at this), cut open, hammered, crushed, speared, poisoned, parasitized, nibbled or "killed by forced entry from non-human predators." They use all their senses to preclude dying as a meal for a day by escape, and over evolutionary time by developing the ideal mechanisms for such defense, a defense that Claassen emphasizes again and again is mainly against their natural predators such as birds and fish rather than humans.
The shell is mainly for protection, but also to prevent dehydration and the mollusks manipulate the shells by "strength, resistance to dissolution, thickness, projections, colorations, narrow apertures, hinge teeth and crenulations on margins and repair, often affixing stones, shells and other detritus to provide camouflage". Particularly clever are the many mollusks that arrange when ingested to close up tightly, thereafter emerging healthy and unscathed through the digestive tract of their predator weeks later.
I am always amazed, after reading something about how a slow moving species like the mollusk or a moth is able to use all types of deception, that anyone could believe that markets and the human actors within it don't make it equally hard to survive with a simple strategy of eating them "raw, squawking and fully feathered" as the great M.F.M. Osborne liked to say.
The two main kinds of structures for animals are the skeleton and the shell. The skeleton hangs the organs around an internal framework, and the shell puts them in a box. The skeleton is much more adaptable, but the shell provides rigidity and protection, a nice alternative. The most intelligent mollusks, the cephalopods, like the octopus and the squid, have given up their shells so that they can be more mobile and flexible. The companies that try to protect themselves with a rigid structure through regulations that preclude competition, or heavy non-reproducible fixed costs, like the mining companies, are like the shells. They can maintain it for so long, and certainly everything they do to create a fixed structure for protection is to be applauded. But I wonder if the companies that are more skeletal, such as eBay and Google, can maintain flexibility as well as providing a fixed barrier to entry and dehydration? May I mention MERC in this context, as having the best of both worlds
As an additional note, the boys in the office are generally averse to a wager because we don't like to gamble, but when we read that you can drop an abalone shell from a second floor window and it won't break, the gloves came off and many nickels changed hands. We dropped it and the oak floor chipped but not the abalone. The abalone has amazing strength, 3000 times stronger than the minerals it's made of. The secret is that it has a crystal formation called aragonite that lays down calcium carbonate between sheets of protein in a regular pattern. Another amazing example of how nature has a million designs that can teach us about engineering. They can also teach us about how to make a stock strong, and I hypothesize that the layering of ups and down in a path, with for example a 5-point move consisting of 25 points up and 20 points down, is much more resilient than a straight-up 5 points.
John Kuhn adds:
The mollusk is a fascinating class of animal; One thinks of the typical bivalve as the aquatic equivalent of the ungulate, attached to the rocks or sea floor feeding on plankton born by wave or gravity, in large "herds", not asking for much; the aquatic equivalent of the ungulate, or vis-a-vis the stock market perhaps the hordes of mutual or even index fund holders, along with small speculators. Don't move much, and those that do don't disturb much and barring catastrophe, on balance as a group live out their four score and ten with adequate nourishment.
But such reductionism falls before the daunting number of as many as possibly 70,000 different species. Some with thick shells, the giant clam for example, the abalone with so many minute layers its construction is being examined for potential military application in armor improvement; others who've left their shells far behind, the squid, the octopi. For the latter their only contact with shells is when they eat their mollusc relatives, the clams. One senses a happy feedback loop between octopuses' brains, for which they are notorious, and the variety of habitat which they can access. Like the perhaps mythic hedge-fund manager, they can "examine and eat more things."
As many molluscs as there are, they inhabit by necessity hugely varied habitats and niches. Limpets here, barnacles there; Sea and land slugs and snails in gardens, on rocks, in sand, on trees, stuck to boat bottoms. Some of the shell-less molluscs can change color seemingly at will for communication, perhaps for camouflage; others, the nudibranches for example, have evolved defenses seen in insects; "poisonous" coloring. And then, getting more directly to the point, there is the highly poisonous blue-ringed octopus. They're everywhere and range from benignant to deadly, grass and plankton eaters all the way to carnivores.
Like the ungulate, the most numerous types, the bivalves, are prey for many other species; and like the ungulate, even if a few are picked off by a passing whatever (bird, octopus, shark, lion, bear market, fraud, margin call) they survive and thrive via sheer numbers. If there's a market correlation, there must be a sufficient supply of, if i may mix metaphor, sheep that the market as a whole can continue to feed. But the environment must never be permitted to become so toxic or the numbers of predators so great as to threaten this dynamic balance. Nor must they be "shorn" in such huge numbers that they bring aridity and death to the ecosystem. (Which is not to deny that a certain class of pundit cannot make a lavish living by attempting to scare them all to death.)
I can't quite find the corollary for "too few" predators however. Yet, for example, the zebra snail is a serious environmental problem.
Some of these molluscs must eat really good food; the giant squid, characterized as a "giant eating and reproductive machine" reaches 75' in length. Like the stock market itself, many of its true attributes are either poorly researched or so far hidden from view.
Dr. Michael Ott adds:
The abalone is a great model. It is able to withstand impact of collision by diffusing the applied force across many random angles. This reminds me of a boxer who knows he is going to be hit, and turns with the punch to soften the blow.
The 'random' angles are set up by the overlaid layers of aragonite, each focused around a calcium atom. The placement of calcium atoms is seemingly random, but if their configuration was slightly altered, the shock absorbing property would disappear. Many minerals have a breaking point called a plane of cleavage. Mica is a well known example. You can smash a chunk of mica with a hammer, and nothing will happen. If you tap it along its plane of cleavage, it will neatly divide, with 2 flat, smooth faces where the mineral was formerly attached. Aragonite has no continuous plane, so the force is dissipated throughout the entirety.
I'm also reminded of the Japanese proverb posted on my website: the bamboo that bends is stronger than the oak that resists.
Sushil Kedia comments:
The logarithmic spiral structure so noticeable when one observes a lateral cross section of a shell is one which has enchanted the minds of mathematicians for many centuries, and bringing up any discussion of this here may also (un)fortunately take our minds to the golden ratio, Phi, Fibonacci numbers. I think it is possibly still worth the risk.
Possibly, the simplest way to construct a logarithmic spiral is to take any two dimensional polygonal shape, say P0 (P - zero) & expand it by a growth factor G to produce P1. Placing P1 adjacent to P0 the next transform is to apply the same growth factor G to P1 to obtain P2 and so on and so forth. The adjacent placements of the similar shapes so expanded and placed one after the other would produce in simpler visualization the logarithmic spiral. Though, there is mathematical beauty of a tantalizing degree present even in evaluating all the more complex formulas, which are available here.
Now, irrespective of whether this constant Growth factor G is phi or any other number one achieves a logarithmic spiral which would on its own find the relationships to phi, e, pi and so on and so forth. This simplification, clearly also fits with the path of least resistance when one gets down to the traditional valuation formula as embodied in the Discounted Cash Flow method. The entire Art as also the Science of valuation is about making calculated (gu)estimates of the Growth factor in the cash flow projections and an 'appropriate' rate of discounting. Companies, investment opportunities and securities that offer fundamental circumstances around them amenable to easier & more reliable estimates of earnings growth are known to Discounted Cash-Flowists to produce estimates of the risk factor or the discounting factor to be far lower than others. Value enhancement is a game of being consistent and being one whose future estimates are more believable if not more predictable. Even though, regulators world over require it to be mandatorily mentioned that past performance is no guarantee of the future, none can escape the demands of the theory of least effort.
So, while avoiding the potential controversies that may come up with Fibonacci, phi and fractals of wave principles one variation of learning that my mind is attracted to seek from the design of molluscs and the logarithmic spiral so dominantly visible in their configuration is consistency and predictability would invariably bring about a sense of beauty on its own and consistent with mathematical properties of beauty - phi, e, pi or any other measures. This last bit might, as Chair maintains needs be tested and could be another direction. For a thought coming aloud, since desire to seek perfection is anathema to human affairs and certainly in trading or investing and since a perfect growth estimate is Utopian [as it amounts to probability = certainty] might not one think of a way to compare earnings streams' projections of a large enough number of securities and work out suitable estimates that may endeavor to compare deviations from a perfectly consistent growth factor to assign ranks, comparative numbers and such similar measures to select securities more preferred than the evaluated universe for building portfolios. Diversification that aims to reduce risk, invariably reduces the possible opportunity. Soldiers who are scoring their battles on Sortino ratios would find concentrating risk and reward as meaningful possibly with this mindset of selecting stocks bottoms-up.
Conches, a particular type of shells that produce pure notes when air is blown through their axis with a consistent turbulence of flow do bring out elements of music that again are consistent with the stricter mathematical definitions of auditory beauty too. For this property alone, since times Vedic that had highly evolved to applying progressed Mathematics, till the present times in Indian Heritage blowing conches alone was the mightiest effort for initiation of war, religious ceremonies or any important adventure. So, might I say, consistency of past, present and future profitability again is nothing but purest music to ears.
Even the hawks (a symbolism for companies that have grown efficiently through gobbling prey) seem to be taking a flight path that is a logarithmic spiral, since their optimal path of vision is a constant growth factor as the predator zooms in on its prey.
The tropical cyclones (read: market catastrophes, possibly) too hurl forward in a path that is a logarithmic spiral multiplying forward their 'zone' with a constant growth factor.
Spider webs (read: manipulation & stock promotions, possibly) fan out in a logarithmic spiral, expanding each next radius from the vertex in a constant growth factor and one where the radius of influence is targeted to have geometric progressional properties.
Whirlpools (a margin call cascade, possibly) fans out again in a radius (the expanse of influence, possibly) that expands in a geometric progression producing yet again a mathematical taxonomy akin to a logarithmic spiral.
Wonder, if these may be non-fantasy-domained germinations of testable seeds of ideas. Measures of variations from constant growth factors that would relatively evaluate similar sets might bring one day to our fold comparatives of comparably similar situations in markets.
So, Phi & Fibonacci may still not be the privilege of the El**o*t wavists alone. Molluscian phenomena come in so many shapes, colours, sizes and levels of deception in the markets too. Might a day be brought upon men of the markets when measuring deviations from beauty of perfect growth be quantifiable and the seekers of the magic of phi in prices dump the chimera for better, realizing the underlying constructs of 0.618 for what they are.