Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner

Home
 

The Chairman
Victor Niederhoffer

 

 

2005 All content on site protected by copyright

 
Write to us at: (address is not clickable)

01/24/2006
Asking the Right Questions, by Victor Niederhoffer

I am often asked what the essential quality for success as a spec investor is. It usually comes up after someone points out that there are so many smart people in the field, that they sometimes feel that no matter what they do or where they go, there is some expert who has access to larger funds and been there before. Their expertise is registered in the current price, and because each event is unique it's impossible to do better than blind chance. Better not to get out of bed at all they seem to say, or possibly to put all their money into a money market fund. How can one improve? What to do?

I do not have a brilliant answer but, it seems to me that the key is to ask fruitful questions about your investments. What is the essential ingredient that will add to your reward/risk ratio with each new investment? How can study of the phenomenon you are investigating provide information that will help? Does the answer to your question help reduce your uncertainty? Can the answer be evaluated for accuracy? Will the answer help you learn and be more successful?

Here's an example of a situation that arises often where I am always called to provide feedback:

There is much bad news around and fear is rampant. The market has just registered a terrible decline, consider the 23 pointer of Friday 20th January as a benchmark. How do you proceed? Four steps relating to asking the right question seem relevant.

  1. Firstly, by classification. Let us start out the way Darwin or Linnaues would have done, with a classification of the decline. How big was it? Has it happened before? Did it occur in conjunction with a recurring announcement or was it a nebulous kind of thing like last Friday's decine? Had it been preceded by widespread declines in the market, like those of 9/11 or summer 2002, or did it occur after a big rise?
  2. Counting. What occurred during these events? A complete enumeration is helpful for rare events, but summary measures such as the mean and average absolute deviation are appropriate for more common events. Particular attention should be paid to the times that great gains or losses, including ruinous ones, occurred in the past. Is the most recent event different in terms of the market action that preceded it, with particular reference to whether it came after a market rise or decline, and how long has it been since the last similar event? Did this one occur near a holiday or the beginning or end of a period?
  3. Next, try to learn from the situation. How could you avoid declines such as Friday's in the future? Perhaps by getting off the tiger you are riding at the beginning of a period. Perhaps by coppering the market moves preceding 4 day weeks? How should you change your activities in the future now that the decline has occurred?
  4. Relations. Why did the decline occur? Was it related to some underlying problem in another market or to a particular aspect of the economy? Was it an imitation of something that occurred in another market? Did it occur as part of a repeating sequence?

The four steps to asking the right questions; classifying, counting, learning and relating, are certainly going to lead to humility. There are so many factors to consider and so many unique things that went into the particular phenomenon you are observing that you know you are uncovering only a small part of the situation.

The uncertainty surrounding last Friday was great, that is a given, but imagine how much more difficult it will be now that everyone has learned and listened to this one.

P.S. Before asking a question, it's important to do some homework. Consider who else has studied the phenomenon, and what has been learned. Consult your data base for preliminary answers so that you will have a foundation for evaluating your own. As a second post script, I started this study by researching how to ask good questions. I found this article for teachers on the essential questions for learning to be the best.

I am unsure if what I have written above is useful or not, but I do know that the inability to ask the right questions has wasted more time and money in our field than anything else.

01/25/2006
Variations on Victor's "Asking the Right Questions," from Russell Sears

It has been said that Einstein was a slacker prior to 1905, although perhaps to justify why the great minds did not recognize his brilliance. I would suggest that Einstein did not change, and he always had a knack for asking the right questions. Nobody, however, asked him anything before 1905.

Even then it took an almost accidental stumbling onto him before his genius was recognized and while he awaited discovery he continued his meager life. There are excuses after excuses as to why his genius was not recognized; he was a Jew in pre World War I Europe, he lacked well rounded genius in other areas, he was a slacker -- preferring to do his thought experiments rather than study. The truth is that, even for perhaps one of the greatest men ever, nobody thought much of him while he was 'asking the right questions.'

If I ever get the privilege of asking Bill Gates a personal question I think it would be this, "Why did you quit Harvard? Did nobody believing in your genius to ask the right questions have anything to do with it?" The professors now will probably tell you how annoying he was, or some such excuse, (imagine a young Harvard student being too brash, must be rare), rather than admit that they did not see his genius.

Victor's love of the history of Charles Darwin suggests that he admires a man who can ask the right questions. Darwin was at least accepted by his peers, but again, Darwin's genius was not recognized at first. Many would argue that the Church and its doctrine blinded the great minds of Darwin's time to his genius. Perhaps there is more truth to this than the Church would be happy to admit, but I find laying blame at the feet of the religious zealots too easy a scapegoat for the great minds of the time. People like to flatter current society by simplifying the past. Chronocentricity.

Another great mind that "asked the right questions" and did not get recognized early on for his genius.

Each of these people have changed the world by asking the right questions. In hindsight, this is easy to see, but in each instance, nobody, at least nobody within the establishment, would initially recognize their genius.

Perhaps wasting society more money than not "asking the right question" is not recognizing or asking the right person the right question.

This has lead me to wonder why people do not recognize the ability to ask the right questions early on as genius. You could argue that 'questioning' is a learned skill, not developed early on, but I do not believe that this would stand up to scientific observation. I believe the above examples show that this is a gift, a gift to be developed, but a gift none the less.

The only time I have meet Victor was at his birthday party in which he asked me how I came up with my observation and post. I began to answer him, but as there were many others there we both got pulled in different directions at the time.

To conclude I have some thoughts about those who are good at asking the right questions.

  1. They enjoy being alone to think. Einstein walked, Darwin went on the Beagle, Gates spens time programming. Perhaps this means that shutting people out is part to blame for the lack of early recognition? Going off the beaten path is easy for these people.
  2. Once their ideas come out they seem so simple as to be common sense. It is like in those old sitcoms where Mom has the great idea but Dad always thinks that it is his. Many people honestly believe someone else's idea was their idea all along.

  3. Asking the right question often is not really recognized as a skill but is seen as an annoyance, until you prove its the right question.
  4. Victor seems to be an expert at asking the right questions, well beyond me. Study his posts. Study those that have asked the right questions, and ask yourself why?

Finally, a relevant idea to test. While CEOs with high class sheepskin do not overperform or underperform. Do companies that only hire top executives from ivy league schools underperform or overperform?

 

Andrea Ravano adds:

I am not sure if it is the right question, but I am puzzled by the dilemma; was Friday the first movement of a large and new sequence of events according to the law of ever changing cycles, or is it quantifiable in terms of possibilities, which, I understand, depend on past occurrences?

Are not the two factors opposing each other, leaving us with a zero sum answer? I am inclined to ask myself which amount of information is discounted in the prices more than counting probabilities? But considering the success of counting probabilities, I may want to change back soon.

Andrew Moe adds:

After forwarding the Hobo's latest tale to my brother, who is a Chicago city cop, I began to ask myself how good policemen analyze a crime scene. Not in the glorified CSI sense, but in reality. It seems to me that they must perform a similar action to us as traders, where we analyze the clues left by the prior day to determine causes and future action.

In looking at the carnage scattered about on Friday, one might observe the bodies of GE and C, both shot at close range. Ah, yes, GOOG down 8% with multiple stab wounds and lacerations indicating a struggle and perhaps torture. All on options expiration day ...

A little research also uncovered this gem on crime reconstruction which echoes the words of the Chair on asking the right questions.

Bo Keely Responds:

Interesting. a good thinker is as hard to find as a good cop, and each should be prized.

I entered a big mid-west paddleball singles tourney this weekend in Chicago. The lefty wallpaper shots were effective to handle a B player, play even with an open player, and lose badly to a young A player. Back to the drawing board. The formulation of sports strategy is similar to the scientific method for crime scene investigation as outlined by the writer below- from hypothesis to testing to conclusion.

My hypothesis is that I need better killshots to end rallies quick to get off the court fast because in long tournaments the least expended player is the winner rather than the best. There will be different paddle angles to try this afternoon to get the killshot down while retaining the wallpaper shots. I'll test these against local Michigan players and draw the best conclusion.

The Chicago tourney was a breath of the old court days. Drove five hours in a snowstorm to arrive at the club twenty-minutes before the first 10am match. It was the wrong facility. Found the right club and the marathon began on Saturday morning. Matches were best 2-of-3 to 21 and lasted up to 1.5 hours each. We walked off one court and onto the next usually with zero rest. Some players had five matches in 7 hours, and by early evening they dropped like flies with cramps. The most fit specimen was a 35-yr. old female pro (#8 in the world) racquetball convert with serious legs who got to the A s and B s finals before pulling a calf, and played on.

Paddleball players are cavemen standing next to squash or racquetball. They re held together with pads, braces and duct tape, and the event resembled a mummy reunion. I felt at home playing in clown shorts and a tie-died tank top. The Chicago club is abandoned and opened for the winter weekend tourney. There was no heat and players walked to matches in coats and gloves muttering about shoveling show. The finals should have been held in the only warm spot, the sauna, in consideration of the dozen spectators.

A good time is had by all. Those are the good old days.

Big Al comments:

One is justifiably embarrassed to post about a crime drama, but it bears on the thread. If you like a good cop show and you want a realistic antidote to the CSI - super sleuth approach, check out Da Vinci's Inquest, a Vancouver-based show just recently in syndication on a couple channels in the US (WGN, for one). Da Vinci's Inquest portrays crime scene work in a much more pedestrian manner than CSI, a bunch of people standing around scratching their heads and trying to figure it out. Plus you get a good dose of decent Canadian socialism to go with it, though the recent election results may alter the spin a little.

More by Victor Niederhoffer