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9/24/2005
I've Got a Little List, by Victor Niederhoffer

Someone's going to consider the influence of vivid events on investor overreactions and point out that after any disaster, all investors act like anything with a 1-in-a-million probability of similarity to the old event is going to have exactly the same impact. Witness all those still waiting for a replay of Oct. 19, 1987, or the hedge fund managers still waiting for 1929 to return because speculation was very big then and is big now, or the idiots who wait for the spread on short-term versus long-term rates to approach 2% again.

I got a little list, and on it will be the reaction of insurance companies to the next hurricane after a big one hits (See the Bloomberg story below), or the reaction of oil after it goes up big on a previous natural disaster. On it will be the weekly financial columnist who's always been bearish since he started in 1964 and the sagacious conglomerateur from Nebraska who started by easing out his partners from the bankrupt textile manufacturer that my equally sagacious friend (who owns the shares from Day 1 because his father-in-law was the company's labor lawyer) says the Sage bought for $750,000 with a $75 million tax loss carryforward.

Vivid events are the one aspect of the promiscuous psychological biases of behavioral finance that wishy-washy academics like to point to that really do provide opportunity for investors. People overestimate the probability of recurrence of something very vivid and easy to remember. Of course, instead of quantifying what vivid events are and finding opportunities to profit, psychologists are more likely nowadays to tell you how it is so much better not to stereotype a minority group by retrieving the one time you got mugged from its ready presence in your memory.

Hurricane Rita, Sparing Dense Cities, May Cost Insurers Less Than Expected
By Jesse Westbrook and Bradley Keoun -- Sept. 24 (Bloomberg) -- Hurricane Rita may cost insurers including Allstate Corp. and St. Paul Travelers Cos. $2.5 billion to $6 billion, less than some of last year's storms in Florida. Estimates are low for a storm of Rita's intensity because its strongest winds hit the sparsely populated western coast of Louisiana, two storm modelers said. Eqecat Inc. projected $3 billion to $6 billion, and AIR Worldwide Corp. estimated $2.5 billion to $5 billion. At $6 billion, Rita would cost as little as a third of what some analysts had expected and a fraction of the $40 billion to $60 billion estimated for Katrina, probably the most expensive disaster in the industry's history. 'This is more of a normal-type storm,' said Bob Hartwig, chief economist of the Insurance Information Institute, an industry group in New York.

Alston Mabry Responds:

Hindsight is so convincing that one almost inevitably fights the last war. The classic example is the Maginot line.

It is often thought that the Germans had superior military technology, tanks and aircraft in particular, in 1940 when they took France in six weeks, and in 1941 when they staged a phenomenal advance into the Soviet Union. However, the French and British had tanks and aircraft equal or superior to the Wehrmacht and Luftwaffe, and were not inferior in numbers either. The Soviets likewise had a much larger army, a very large air force, very good tanks, and continued to advance armor technology throughout the war and produce some of the best tanks in the world.

The Germans were not superior in technology or manpower, but in thought and application. While the allied powers were afraid of fighting the last war, men like Guderian and von Manstein were fighting the next. Ironically, the Germans had learned much about armored warfare from men like Mikhail Tukhachevsky whom Stalin executed in 1937, along with other talented Red Army officers.

9/25/2005
A Little List, Lyrics by V. Niederhoffer and L. Kenner

(To the Tune of "As Some Day It May Happen," from The Mikado by Gilbert & Sullivan)
As now is a good time to finally clean up this town
 We've got a little list
 We've got a little list
 Of charlatans and pessimists who should be underground
 Who never would be missed
 Who never would be missed.

 There's the foolish blusterers who never have a losing trade
 And all the brokerage analysts who never say "downgrade"
 And the pessimistic guru who lost hope in '65
 And the floor broker who says your order never did arrive.

 Chorus:
 We've got 'em on the list, We’ve got 'em on the list; and
 And they'll none of them be missed
 And they'll none of them be missed.

 There's the billionaire complaining taxes really are too low
 And the tout who likes to write about his own portfolio
 The journalists who publish charts with lots of colored lines
 And the bear who's always seeing a new kind of danger sign.

 Then the people selling systems that with just a tweak or two
 Would clearly beat the hedge fund guys with hardly a snafu
 And the worshippers of Buffett who show up in Omaha
 To pay homage to the miser whom the media holds in awe

 Chorus:
 We’ve got 'em on the list, we've got 'em on the list; and
 And they'll none of them be missed
 And they'll none of them be missed.

 And the personal finance writers who take chapters to explain
 Everything that's obvious or not much of a strain
 The purveyors of newsletters of technical analysis
 They'd none of them be missed
 They'd none of them be missed.

 And whosoever will, with sophistry resist
 Their well deserved inclusion on this soon forgotten list,
 Shall banished be to lower realms where artful sinners dwell.
 And join their brethren howling, from the seventh circle of Hell.
 But it really doesn't matter whom you put upon the list
 For they’d none of 'em be missed
 They’d none of them be missed.

 Chorus:
 You may put 'em on the list
 You may put 'em on the list
 And they'll none of 'em be missed
 They'll none of 'em be missed.

More writings by Victor Niederhoffer