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Victor Niederhoffer



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The Judas Goat and the Markets

The Judas goat combines the reprehensible characters of the apostle Judas Iscariot who, in the guise of a friend, sold out his master for 30 pieces of silver with the capricious and wily nature of the goat. It applies to an animal or person that is trained to lead sheep or cattle up the slaughtering ramp, exiting by a side gate to repeat the process. Goats are a particularly social animal and destructive of pasture land in the wild, and it is common for a special Judas Goat equipped with a radio tracking collar to be sent out in the wild to join his wild counterparts so that they can be located and exterminated.

Jack London, who seems to know much about investments, has a nice use of this well known tendency in White Fang. A female dog lives with wolves and is trained by the wolves to be particularly attractive to the dogs on a sled. She lures them to enjoy her affections and when the individual dogs find her attractions irresistible, they are quickly slaughtered by the pack.

"Look at that, Bill," Harry whispered. Full into the firelight with a stealthy sidelong movement glided a doglike animal. It moved with commingled mistrust and daring, cautiously observing the men, its attention fixed on the dogs. One Ear (one of Bill and Harry's remaining dogs) strained with eagerness. "It's a she wolf", Harry whispered back, "and that account for Fatty and Frog (two dogs that the she wolf led to slaughter). She's the decoy for the pack. She draws out the dog, an then all the rest pitches in an eats 'em up".

Yes, but, such a common contrivance in nature (see Letters from a Self Made Merchant to His Son for a similar story), must have counterparts in markets. I invite readers to add to the following list:

  1. The January Barometer, which in two of the last three years gave terrible bearish signals: 2003, January down, then the rest of the year up 30%, and again this year, January down 2.5%, then the rest of the year up 7%. And related seasonal effects in December that caused the 10 stocks down the most in December of 2004 to lose ~20% in January 2005.
  2. At a more general level, the pattern that has worked many times in a row and is a sure thing for profits. One of my colleagues found a oil pattern that had worked 35 times in a row right before the Gulf war and bought oil based on it before we launched an attack to get the Iraqis out of Kuwait, and found that oil went down 33% over night and he lost his entire stake.
  3. The fundist who's had 10 good years in a row with a Sharpe Ratio of 100. As St#n J#nas says, the higher the Sharpe ratio, the more the fund is subject to ruin. And as I like to say, the only one that can grind is the house. (I understand that a certain firm has had the #1 performing large CTA program three years in a row, and I'll have to watch that firm's results closely to see if they can avoid the syndrome, and whether their notorious head trader has learned anything these past 8 years).
  4. The big down move after a major company like Intel or Microsoft announces earnings or sales. Invariably, the market craters and Susan says "You look worried. Do you really have to get up 100 times in the night at your venerability? Don't worry, it will be much better in the afternoon."
  5. The announcement of a natural disaster. Well, everyone knows that the San Francisco Earthquake of April 1906 led to the 50% decline in the Dow in 1907 that the Boy Plunger made a killing on by shorting, so let's sell the market down 5% whenever another such natural catastrophe occurs.
  6. The insider who buys his stock shortly after a public offering. Many know that companies bought by insiders perform some 3% a year better than the indexes. So if a insider buys, run out and buy. My goodness, I've been victimized by this many times, especially by the small cap biotechs that I buy on this signal, or the recent IPOs. What I didn't realize, until one of my friends whose firm recently went public told me, is that the underwriters and analysts are on top of them every day to buy their company's shares so the insider signal will lead to an avalanche of copycat buying, possibly even enough for the big boys to get out of their unsold allotments. A good book on this subject is Investment Intelligence from Insider Trading, by H. Nejat Seyhun.
  7. The upbeat statement by a most hubristic and famous executive. A certain technology executive from the Appalachians has become so famous for this that no matter what he says, the stock immediately tanks.
  8. The Sage's constant bearish message. He's been eschewing stocks since the 1990s, finding no good ones to buy, thereby leading millions to stay out of the market after the 2000-2002 bust.
  9. The financial weekly columnist who has been consistently bearish since 1964 and invariably has 20 very convincing reasons not to buy now, until "the last bit of bullish enthusiasm is washed out of the market" and a true selling climax occurs. "What was the crash of October 27, 1987? A beginning!"
  10. The fixed system that has amassed so many riches for its users that sports team ownership is in the cards for anyone who buys the system, attends a seminar, or participates in an investable program.
  11. The media that herald news designed to put the investor on just the wrong foot following just the wrong things such as "earnings woes causing stock market declines" that will make them contribute unduly to the massive frictional costs of the infrastructure.
  12. The guru who noticed that the market was down 30% in 1987 by using chart analysis, and knew from his charts that double bottoms are always formed, and thereby waited, who is now very bearish on the market in contrast to his previous bullishness.

You get the idea. Give us more!

Peter Gardiner Offers:

  1. An increase in alert status from yellow to orange
  2. Notification that the price of oil is up 80% in the year
  3. Reminder by financial media that an inverted yield curve portends recession but that a steepening curve suggests inflation, thereby encouraging the inference of impending doom and higher news media circulation.

...and on and on... too many and too pathetic to enumerate

From Joe Hughes:

One we will hear within the month of January: will be the Super Bowl AFC bearish, NFC bullish barometer. I can't remember the last time the NFC won, and if the Patriots can blow up a barometer, and you having lived in Boston during their puke awful days, must cringe when they bring this junk up. As if anything should've been a dead sell, flat out, end-of-the-world, going-to-zero barometer, it would've been the unlikely occurrence of the Pat's winning the Super Bowl. That's apocalyptic, (sp it's late) even more so than the Red Sox, White Sox or god forbid the cubs, who are tied to the goat.

A few from Kim Zussman:

Sell in May and go away (check what happened 5/05)

Januaries are best month (check what happened 5/05)

Santa Rally (check what happened 11/05)

Expert says buy VIX < 11 (check what happened to him)

J.T. offers his Favorite:

The best leader in the goat category for me is the very simple Vig/Spread/Grind lesson. It is so eloquently spoken of by Arthur Crump in "The Theory of Stock Speculation" via Nelson's Wall Street Library Vol. III (1900). Crump also uses so appropriately the words "decoy-duck" to explain the dilemma. Here is the paragraph from Chap. VII "Pitfalls".

"A broker, it may be said, should warn his client before putting him into a stock the price of which is wide; but unfortunately such warnings do not increase the number of commissions, and, apart from that, if a speculator does not take the trouble to inform himself accurately upon such a point, placing no reliance upon the advice of any one, he deserves to lose his money. Some markets are so small that a speculator once in, is what is called "roasted" before he is let out again. A particular man very often is the only dealer in the market in a certain stock of which perhaps the supply is also very limited. Under such circumstances a haphazard speculator who may chance to have observed some rather violent fluctuations thinks there is a good opportunity to make some money, and he sells a little bear a couple of thousand pounds nominal of stock. The round sum, and the channel through which the sale comes, helps the jobber to read the operation. The decoy-duck in the shape of the fluctuations in price, lures two or three more sportsmen on to the dangerous ground, and when they want to get out the price is put up against them, and they are quietly mulcted of 50 lbs. each, without a chance of getting even a sight off their enemy, or any value for their money but experience."

A Judas lesson from David Wren-Hardin:

The I Think I Know More Than I Do Goat. This goat entices someone with expert knowledge in a field to think that gives him an edge in valuing a company that uses that knowledge. As a new trader fresh from graduate school in biology, I eagerly bought Celera during the human genome sequencing race. After all, I could evaluate the science, and knew that they "had a good technique." I paid $200.00 a share, close enough to the top to be the same thing. This goat also led people enamored with their new Palm device to pile into that stock ("Look at me! I'm Peter Lynch, buying what I know!").

I learned my lesson after Celera, and rarely buy individual stocks. When people hear I'm a trader, they frequently ask me for my investment ideas. I quickly say I'm the worst investor I know, that I have 97%+ of my stuff indexed. Sure, I may trade thousands of shares a day, and can price some things to the penny. But fundamental analysis? Forget it.

Sushil Kedia Forwards A Story About the Economics of Goats


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