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22-Aug-2006
Victor Niederhoffer reviews Trees: Their Natural History by Peter Thomas

Almost every page of the book 'Trees: Their Natural History' teaches one new things about the workings and adaptations of trees, and I find these lessons of great value in improving my understanding of the markets.

The chapter on the shape of trees starts with the idea that one of the objectives of a tree is to raise its leaves above a competitor's, so that it can get the greatest possible share of light. It makes its shape based on a compromise between this and its other needs; its ability to pollinate and disperse its seeds, how much trunk it needs to support itself against wind, snow, and moisture, the conditions of the soil, the threat of fire and insect pests. All of the compromises vary with age.

One thing learned is that trees found at a high latitude and altitude are cone shaped with short downward sloping branches, and that the broad crowns of most hardwoods are associated with moist sites, deep shade, or harsh tree line conditions. In Britain there is a moist environment so most of the trees take on spherical shape.

Pines further south develop a flat topped umbrella shape which helps resist drying winds and maximizes convective heat loss by allowing free passage through the canopy

The tree is an expert in shifting its center of gravity so as to minimize stress on any part of its structure. The principle it uses is to minimize lever arms. This means making the weight that any branch carries away from a fulcrum as small as possible, reducing the possibility of breakage. This principle keeps the horizontal length of a branch as small as possible, always subject to the compromise that the further a branch is extended outwards, often the more light it can get.

What the tree does is to bend its branches upright, so that the lever arms are not pulling the tree sideway. This applies not only to branches, but to the leaning of trees towards the sun. A beautiful set of diagrams illustrate the similarity of the adaptations that the tree makes to maintain a center of gravity to the adaptations a human makes to maintain their center of gravity. Trees use their terminal buds to build modules that change their shape, while humans use the brain to decide to change our center of gravity, for example when we bend forward whilst we are climbing up a hill.

Sample market hypotheses generated by this way of thinking are:

The horizontal moves of markets would seem to be the reversals that they take from a given center of gravity. The more that they reverse to one side from a central point, perhaps a round number, the more likely that structures and activity will grow on the other side to minimize the stress. Eventually, conditions of light (competition) cause the market or a stock to move.

Alternatively, the greater the rate of ascent or descent, the more likely a market or stock is to show movement in a opposite direction to bring its center of gravity to a more stable level.

Steve Leslie adds some Bamboo facts:

What I find particularly striking about bamboo is how it develops its root structure first, which may take up to three years, and then the plant explodes in growth and may grow to over 100 feet tall in several months. Without building its roots first, it would never grow to its planned dizzying heights and you cannot rush the process.

I always think back to Peter Lynch who commented that his greatest success stories in stocks, most of his ten plus baggers, occurred in the fourth year and beyond of holding the stock. It just takes time for the great stories to unfold, such as turnaround stocks, and especially in growth stocks patience has its reward. As a wise plumber once told me before I undertook a job "patience is the key".

There is much to be learned about speculating from the growth and characteristics of the bamboo. The similarities between bamboo and growth stocks are remarkable and the investor and speculator alike can dramatically improve their financial returns by studying the bamboo.

J.T. Holley responds:

Something that I have dealt with recently is the feeding of dying trees to resuscitate or bring them back to life. 'Spiking' trees with silly fertilizer spikes works well with the smaller trees, but you need bigger guns when you have the limbs leaning downward towards the ground. In parks and high traffic areas this is a huge hazard, the tree will seem to shed the limb to relieve the stress that Vic has mentioned above.

The only thing I learned regarding saving a tree is to take an auger, pipe, or some large metal rod and drive it into the ground. Rotate this until you have a two to three foot deep hole and pull it out. Fill this two thirds full of 10-10-10 and cover the rest with dirt and put your grass back over. These holes must be done around the 'drip zone' coming off the base of the trunk just inside the 'splash zone' from the outermost limbs.

I too believe, and should test, that the markets use these round numbers or spots to relieve their stress. These spots of light and competition allow it to be able to gain strength in times of weakness (sell off) to gain the nutrients to move higher and become stronger than before! Its like testing and finding Trend followers spots where they utilize "reversing stops" with their "fixed system". The Drip Zone is where the fertilizer is planted to pick 'em off and gain the edge.