Daily Speculations

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The Chairman
Victor Niederhoffer

Trading Lessons from Louis L'Amour

Hondo, by Louis L’Amour, is a great Western novel about a man striving to live proudly, conquer evil, survive, teach and find romance on a desert frontier in Apache and U.S. Cavalry territory in 1890s Arizona. John Wayne said it is the best Western he'd ever read, and it's widely considered to be L’Amour's best. Since the Apache's were the greatest fighting force (relative to their equipment) and tracking force in history, and L’Amour has sold more Westerns than all other Western writers in history combined, and his books are always accurate in all things topographical and natural, and martial, I thought it might be good to learn some market survival tips from it .

The lessons I learned were mainly from the survival techniques of the frontier scout and the fighting techniques of the Apache. They are so numerous and L’Amour’s writing is so good I read the book with a red pencil, underlining all the helpful hints I learned. I take the liberty of enumerating them with my comments. It might reasonably be objected that these are sensible things like a million other rules and homilies that haven’t been tested and might already be encapsulated by the market. I feel that this objection is overridden by the success and wisdom of the main techniques offered and the fact that their application seems essential to the survival of humans and embodies the main values of America. In a nutshell, I found the advice about always being ready for an ambush, never trusting your enemy, always expecting the unexpected, being careful and observant at all times, never giving up and yes, relying on your friends -- yes, especially your dog -- for help in a pinch to be the overriding themes of value for a trader.

Look before you leap

He studied the terrain with care, a searching study that began in the far distance, and worked nearer and nearer , missing no rock, no clump of brush, no upthrust ledge.

Before making a trade, look at the environment -- ecological, political and economic. Then examine your counting to see if it is overturned. Finally, beware of the hidden dangers, like the announcement coming in 5 minutes.

Patience is a virtue

Patience at such a time was more than a virtue. It was the price of survival. Often the first to move was the first to die.

The old board game idea of sitting on your hands before you move or trade -- schtaaaalllll…. as the great German grandmasters liked to advise. How often have you wished you waited an hour or a day to come in to the market, and how much better would you have been if you had. Test it.

As usual, the unusual

To his right there was a shallow saddle, the logical place to cross a ridge to avoid being skylined. Logical but obvious. It was the place an Apache would watch.

Yes, the Level 1 deceptive techniques the market throws at you are one of the most frequent ways to ruination. The angler fish holding out the worm that looks so inviting until you get swallowed when you try to enjoy it. How often does a option sell at an unusually good price right before some completely unexpected (and totally unknown ) catastrophe is about to occur. My goodness, the option volatility in the index in the days leading up to Sept. 11, 2001, was at least 50% higher than the base, and I must admit I succumbed and sold some naked puts when out of the clear blue sky the adversary bid me some fantastic prices. It was certainly nip and tuck then. Don't cross or trade at the obvious place if you wish to survive in desert territory.

The trade begins when it ends

As he fired, he moved getting into a new position in coarse grass. And there he waited.

Sometimes the best opportunities (and, regrettably, the worst dangers) come right after the trade when you've let down your guard and gone out for a snack or taken the liberty of uttering a self-aggrandizing word to your colleagues.

Still waters run deep

Reaching the stream at a bend, Hondo walked into the water on an angle that pointed upstream. When he was knee deep he turned and walked back, downstream and stayed with the stream for half a mile, then emerged and kept to rocks along the stream for some distance further, leaving them finally at a rock ledge. When he left the rock he was again walking upstream. He used every device to hide his trail, changing directions with the skill of an Apache. He lay still, avoiding looking directly at them for fear of attracting their attention.

Yes. Yes. Yes. Don't spread news about your trades to your counterparts or your adversaries, as you might be the victim of a squeeze or worse. It’s tough out there, and the people who would do you in are very good at reading careless sign.

Conservation of Energy

Even when he moved there was a quality of difference about him. Always casually, always lazily, and yet with a conservation of movement and a watchfulness that belied his easy manner. She had the feeling that he was a man who lived in continual expectation of trouble.

Whenever anyone watches me play a racquet sport, there are invariably two stages. First, That couldn’t be Niederhoffer – he’s s so awkward. Then, as the game draws to a close, My goodness, he’s not even sweating. All greats at their game make it look easy by moving the bare minimum. The same is true in trading. You put a position on.There's a reason for it. Don’t get squeezed out of it by ephemeral factors, especially a stop on the floor, or a move in your favor

Know thyself

He was a man who knew himself, knew his strength and weakness, who had measured himself against the hard land of his livingg. against the men of that land, and against its wilderness The cobbler should stick to this last. If you're a long term investor, be so and don’t day trade. If you can only handle 100% margin on a position, don’t switch to futures where you can go with only a 10% margin. If you use Value Line earnings momentum for your stock selections, don’t be swayed by a article in a magazine that questions the ability of management.

Only the house can grind

Frightened by what she had done, she stood helpless while he gently took the gun from her hand. “Shouldn’t point a gun at anybody when there's an empty chamber under the firing pin. It can be seen mighty plain. ‘Specially with the light behind it.”

This one has multiple meanings and lessons, as do many of the other passages quoted here. The main lesson for me is that you have to go for the jugular when you take the initiative. No half measures. If you're a speculator, you have to speculate and take reasonable gains and losses, not try to get out at the first profit. A variant is that only the house can grind as it has so much lower commissions and transactions costs than you.

A Sixth Sense

Davis glanced aside at Lyndon, a quick frown shadowing his eyes. Coming from Lyndon, it sounded ominous. Davis knew enough of such men to realize they often knew things without being able to explain why they knew them. It was, he supposed, a result of some subconscious perception.

Occasionally, I have a perception of imminent danger that goes above and beyond the numbers. And even without a dog to help me, I find that these dangers often turn out to be correct. I had such a feeling of terror on Sunday, Oct. 26, 1997, one day before I went under.

J.T. comments: Philip Carret cautioned against buying the dividend yield. That is a worm to sink one's teeth into. CMS and CNC preferreds were some examples that were mighty ruinous to myself, and they were disastrous before the first dividend was even paid. Or those darn Enron preferreds that were supposed to have higher liquidation priority than the common just in case of bankruptcy. I am afraid that Geronimo would have put an arrow in my back if I would have passed that logical place so many times.

Mr X adds :

Decided to pick this up and read it this weekend. Loved it.

pp 97 "He moved now as he had before. He scouted the terrain before him, and only then did he move. He knew much of it, but did not rely on their knowledge"

pp 121 "One cannot fight the desert and live. One lives with it, or one dies. One learns its ways and its life, and moves with care, and never ceases to be wary, for the desert has traps and tricks for the careless."

pp 126 "Hondo Lane was tempted to touch a spur to the lineback, to lunge into the Indian, to make a break for it, hands tied or not. But his good sense told him the futility of that. There would be a time. He must wait. He flexed his stiff, swollen fingers. But he made no sound. He did not groan, he did not curse."

pp 150 "'See the other fellow first,' Hondo said. "Then you can let him see you or not, as you like. Never make a fire with smoke, even in good times."

pp 188 "Attacks began and ended. The Apache was never one to trust a wild charge. He was a shrewd and careful fighter, knowing the value of cover, moving with care, never wasting time or shots. They moved in closer, closer."

It struck me when reading that so many of the skills require a combination of vigilant, careful, unpolluted observation and enormous restraint in action, until the proper time.


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