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29-March-2006
How To Raise a Spec Investor, Part II, by Victor Niederhoffer

Apparently I've hit a responsive chord with my letter to the unborn son about how to become a good spec, and I take the liberty of enclosing my next installment. I intend to make this series of letters an open thing that anyone can contribute to so that it's really good for kids, so please augment and sharpen and guide me.

Let's start at the beginning. You're going to be shaped by books, so you should try to read great ones. The best ones are those that talk about great things, great virtues, in a way that makes you think the author is rolling around with you, pitying as much as exposing, dropping a tear as well as a laugh, sharing a brotherhood with you, the characters, and your neighbors. And there is no one better to start with then Louis L’Amour himself, the man who wrote about a father who wanted his son to be just as good a criminal, as I want you to be a good spec.

Others agree with me here. He's sold more books about 500 million than all other Western writers combined, so he touches the universal hopes and values. As he says, "Every American has a bit of the frontier in him"

A good one to start with is his first, Hondo, a story about a father like me trying to teach a son lessons for life set in Arizona where the Apaches and the settlers fought for survival and a wonderful woman like your mother refused to give up in the face of hardship and danger. Here's how it starts:

An hour passed, and there was no more dust, so he knew he was in trouble. His horse crowded against a dark clump of juniper where he was invisible to any eye not in the immediate vicinity. Dust meant a dust devil or riders, and this had been no dust devil. The dust had vanished and that meant that he had been seen. He studied the terrain with care, a searching study that began in the distance, and worked nearer and nearer, missing no rock, no clump of brush, no upthrust ledge. He saw no further dust. He did not move. Patience at such time was more than a virtue. It was the price of survival. Often the first to move was the first to die. His eye worked along the ridge. 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. Hondo Lane could smell trouble and he knew it was coming, for others and for himself.

I know you're going to want to read many of the 100 novels that L’Amour wrote, and that you'll learn and be inspired by them. But before you read it, know that most of your college friends, your professors, and all critics are going to tell you that L’Amour writes summer trash, pageturners, pulp fiction. Part of the reason is that they don’t get the spirit of searching for new boundaries, freedom, adventure, chivalry and individualism that is the code of the West that he writes about. As L’Amour put it "If you write a novel about some woeful, forgotten, ephemeral piece of history that took place East of the Mississippi, you've got historical fiction. But if if it took place West of the Miss, why then it's just a Western. But more important, L’Amour and other great books that are best sellers like those of Jack Schaeffer, or Patrick O'Brian, or Victor Hugo, are about heroes that you might grow into--- heroes who are competent and self confident, self reliant, proactive, and productive. These are just the kind of people that threaten the sense of mediocrity and victimhood that is the spirit of the second handers and levelers that have the world of ideas and education in its grip.( I know that's hard for you to grasp now, but some day it will all become so clear when you read about the destroyers, those who must make everything that is great seem small that are the forces of evil arrayed against L’Amour type heroes like Hondo, or Schaeffer type heroes like Monte Walsh or Shane, or O'Brian type heroes like Aubrey, or Hugo type heroes like Jean Valjean.

Anyway, I've just read Hondo again and so much of it is crucial to the spec spirit - how to survive, how to be ready for and avoid the 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, especially your dog for help in a pinch that I'm going to memorialize just a few of the main takeaways from it that you might use as a model when you read it and the other great Westerns.

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 living. 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. I want to encourage you to read many of the novels of the other great writers mentioned above.

Yes, I'll take the liberty of giving you a little guide to them and a few others in some of my other letters to you. And if you want to take a break and see what other kids learns from Hondo, especially those in the West of the Apaches that Hondo loved and fought, read this teacher's guide. You're going to be learning a lot from teachers guides like these because the best lessons you learn from books are going to come as you ask the kind of questions that a good teacher would encourage you to ask if just you and she were sitting on a bench together in a park talking about things you both cared about.

One more thing, while you're sitting on that bench or anywhere else for that matter, always keep your sixth sense going. The sense of danger that Hondo had that he couldn't put into words, and that he couldn't explain when he felt that attack , imminent death, or bad people lurked. I had such a sense on October, 26, 1997, one day before one of the greatest tragic days in my life, a day that would have done me in if I hadn't made the games my Dad taught me and urged me to play so much a part of me. I intend to teach you games the way my Dad taught me and I hope that you're going to start with those that Dad and I loved, games like baseball, and checkers and chess, and swimming and tennis - games that will get you out in the open and help you enjoy nature, get you learning how to attack and defend, how to deal with deception and disguise, how to survive, and come back from hardship; how to use your body and stay healthy, how to have fun, how to rely on friends and avoid enemies, how to cooperate and compete. I'll start on that in my next letter so that you can play while you're reading some of these great books.

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