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The Chairman
Victor Niederhoffer



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Variations on A Christmas Carol, by Victor Niederhoffer

"Come then," returned the nephew gaily. "What right have you to be so dismal? What reason have you to be be morose? You're rich enough. Don't be cross, uncle."

Ghosts of the Past. My first partner, Frank Cross, was a brilliant arithmetician and clerk who discovered, among other things, the Friday down-Monday down effect. He died at the age of 35 some 20 years ago from excessive morbidity and alcohol. But I often think of him on Christmas Eve, especially after a good year. Whenever we'd make a good profit, I'd call him up to relay the good news, and tell him about his share. But that only made him more depressed. "If you could make a million in one day," he'd say, "then you could lose a million also. And that's more than we should have on the table." How right he was. My firm has had a pretty good run, indeed a relatively unprecedented one, according to any fair reading of the ratings service. And that's when we must be ever vigilant not to lose it according to the same Lobagolan path that we made it with. The market hasn't has a decline of more than 6% from peak to trough or a decline of more than 2% in a day in more than three years. What a field day it would be for the doomsdayists, the black swannists, the prudents, the abelflecbuffeterosoroses, the shilleroids, if they could put a nice sustained series of back-to-back declines in the hopper before the inevitable April 15 revulsions.

An Unhealthy Asymmetry. I find that I have been very prominent in the news the last few months, having been starred in Institutional Investor for giving a terrible talk on musical speculation that people walked out on at U. Penn, symbolizing everything that's wrong with hedge funds, and of course receiving more prominence than everything else in my life combined for supposedly being a key link in the R#fco debacle. The trader sites love to talk about how I am a poster boy for how to go under, having done so so many more times than is commonly believed, and having contributed much more to the market than I made cumulatively. Even to try to defend myself against these completely false accusations admits unduly their verisimilitude, but I have so many hoops that I must fit through vis-a-vis performance claims that it would be untenable and unsustainable for me to mount such a defensive even if I wanted to. Somehow I have been mentioned a million times as a key link even though I have had no contact or financial connection of any kind with R#fco for seven years, but a personage who received a billion-dollar distribution before the firm's 2005 public offering has only been referred to as "an undisclosed party." I wonder why not one of the hundreds of publications that have covered my activities these past years has considered it newsworthy to consult any of the dozen performance reporting services for managed account firms. So I must be content to say, "What else can I do, when I live in such a world of fools such as this?" or to respond, as Scrooge did, "Bah, humbug."

The Seizing of the Ruler. When an employee regaled Scrooge with, " God rest you merry, gentlemen, may nothing you dismay," Scrooge seized a ruler with such energy that the singer fled in terror. Yes, that's how I am. About a hundred times a year, I call out in the trading room: "Silence in the office. What's all this excessive exuberance? We're in crisis mode. It could be life or death in an instant."  I find that whenever the animal spirits are too high, my traders tend to get too relaxed. They are more prone to give up the extra edge on the trade. To use market orders rather than limits. To accept the first bid or offer without haggling. To overtrade. To allow the other side to get out of their rare losing positions with me without undue hardship to them. I have traded about 30 million contracts in my career in speculation averaging about $150,000 a contract in face value. If I paid $30 more for each contract, or just 0.02% more, I would be a dead duck. If I regularly allowed my operatives "to make excessive provisions" for the hardships of the liberal brethren among the dealers and front runners on the other side of my trades, why, I would have spent my entire life on the treadmill or the poor house, and my family and I would be in want of the common necessaries and comforts of life.

A Ghost Appears. Ghosts often appear in Wall Street. They hung out around Trinity Church in the old days, but nowadays they are more likely to hang in cyberspace. "What do you think of LU at 20?" The Collab and I always hear questions like that when we try to deliver a talk about meals for a lifetime to unhearing ears. Bull operators often depart from the speculative arena, penniless and heartstruck, like Morse in the 1860s. "He had now only the shadow of a great name. He was pointed out in the streets as the man who had once set the market in a blaze, but now capitalists shrink form him as if he had the leprosy. One day , more than a year after his failure, he was seen on the street and Fort Wayne rose 5%. Then came disease gnawing at his nerves and heartstrings. No longer blithe and gay of mien, but morose and irritable."

An old supporter describes Morse after seeing him at a gambling house:

A gaunt, pallid face, the features sharpened by the fell disease under which he was suffering and wearing those death-like lines with which consumption makes its prey. Alas, how changed from the Morse who had but the year before led the dashing ranks to the summits of the market.
-- Ten Years in Wall Street, Wm. Worthington Fowler, 1870

The rest of the story is too sad to tell, as it involves some friends stepping up to pay his landlady the trifling debt he owed so that "the funeral rites could be performed over all that remained of what was once a king of Wall Street." I know the situation. Once I was like Morse, and I came back. I notice that after up years the market is much less volatile than after down years. After an up year in 1919, the market dropped 37% in 1920. After an up year in 1936, the market dropped 40% in 1937. After an up year in 1961, the market dropped 25%. The only other big drops after an up year were like those of 1957, 1973,  2000, when the market dropped about 16%. I believe it being 11:30 p.m. Christmas Eve, I will close the counting house.

Irony of Scrooge, from Dr. Kim Zussman

The irony of Scrooge was not that he ought to have been happy with all his money. Rather, it was that he was so wrapped up in his miserable existence that he failed to notice the good in the world (there is also a socialist theme omitted here). And it took ghosts, proxies of his own mortality, to drive the lesson home.

A real life irony witnessed on many occasions is the question of how differently to live if one (or a loved one) had only a short time left. Usually such are asked in hindsight, after a passing, as if to grab a little of what is lost. And the irony is that no successful person is incompletely absorbed in their challenges, because the sum of all attentions (outward and inward) is finite.

It is also ironic how considerations to avoid regrets, along with successful competition, must be derived of the hard-wired genetic programming of evolution. And such natural risk-avoidance, which got us this far up the tree of evolution, is the antithesis of successful investing.

These are among the best of times, and in the past times have been worse. Using DJIA daily closes since 1930, and counting days where the prior 10 days have a cumulative decline more than 10% recalls these times. The number of such days within each year:

2005     0  1986     0  1967     0  1948     0
2004     0  1985     0  1966     0  1947     0
2003     0  1984     0  1965     0  1946     4
2002     4  1983     0  1964     0  1945     0
2001    11  1982     0  1963     0  1944     0
2000     0  1981     0  1962     2  1943     0
1999     0  1980     0  1961     0  1942     0
1998     6  1979     0  1960     0  1941     0
1997     1  1978     1  1959     0  1940    13
1996     0  1977     0  1958     0  1939     2
1995     0  1976     0  1957     0  1938     8
1994     0  1975     0  1956     0  1937     9
1993     0  1974     9  1955     0  1936     0
1992     0  1973     0  1954     0  1935     0
1991     0  1972     0  1953     0  1934     3
1990     0  1971     0  1952     0  1933    12
1989     0  1970     1  1951     0  1932    52
1988     0  1969     0  1950     0  1931    44
1987    12  1968     0  1949     0  1930    22

Such occurrences were common in the 1930s, but much rarer since. The number of years between these large declines ranges from 0-15, with average lifespan of six years. It has been three years now since visitations of such spirits.

James Humbert adds:

Without ruling out the possibility of me being a complete imbecile, I believe the people that accuse the Chairman of this or that, or sparking the collapse of a R#fco, are from the same school of those Abelflecwhatevers. It is a twisted irony that while they are a necessary component in the market if a speculator is to profit, one's character is under constant insult as a price for it.

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