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The Chairman
Victor Niederhoffer
2/1/2005
Strategy, by Victor Niederhoffer
I found an interesting discussion of strategy and the analysis
of the value of indirection in war games based on writings from Chapter 20 of Liddell Hart's
book "Strategy".
I came across it indirectly through my study of shuffleboard strategy but the
principles seem so applicable that I remain flexible enough to transmit how
they apply.
1. Adjust your ends to your means. Choose the markets, companies,
risk and the position size that are appropriate for your own wealth and risk
structure. Key question: "Are you trying to grind when the house has the edge?"
2. Keep your object always in mind. Do you really need to trade every day, trying to take advantage of every opportunity. What happens when you get
contradictory signals. How about realizing that "just because an enemy held
town lines between you and the finish doesn't mean that town is worth the time and
cost of capturing". Perhaps save your men and money for another day?
3.Choose the line of least expectation. My goodness, we've all heard of the
line of least resistance. But this is good. If your enemy is expecting you to be
loaded up at 3 pm for example, as in the recent past, how about becoming active
after he unloads. After all, some time he'll have to buy them back. "Where would
you put your limited resources to meet the most likely advance. That's the
point to focus on."
4. Exploit the line of least resistance. Aim at your your
enemy's weak spot. That often occurs after they've utilized all their
resources to force you into oblivion. Don't do more work than you need to.
5. Take a line of operations which offers alternative objectives. If you're
going to get out at the close, like the mill run of day traders, you're a
sitting duck with no alternatives. "if you have multiple objectives to choose
from, you keep the enemy guessing.... but focus all your efforts along a single
line but point that line so that it threatens several targets". Always plan
your activities so that you're not dependent on a single strong hour, strong
earnings report or single government announcement that you've been tipped about.
6. Ensure that plans and dispositions are flexible and adaptable. What will
you do if your trade is not a success, if it goes against you and your mental
stop is not in place. Oh my gosh, how would you react to a margin call, or a
bear raid? "Be mindful that even if things go well for you against the enemy's
weakness, they mite go badly on the flanks".
7. Do not throw your weight
around when your enemy is on guard. Wait until the market mistress is
demoralized. Or overconfident. Like on Friday, when the bears were relaxing in Davos, bashing America, not prepared for the inevitable triumphal profusion of
the unquenchable spirit of freedom in Iraq. The 5 minutes around the Friday S&P
close gave a nice 2% advantage against the chronics. "Confusion is cause
d by cutting off the enemy's communications with headquarters" .
8.Don't renew an
attack along the same line (or in the same form after it has once failed). The
idea here is "hitting the same trade with the same punch that just failed is
bound to fail because the enemy will likely send reinforcements up". But often
the beaten favorite wins next time out. So I would modify this, to probe for
where you think the enemy is weak. Like after they've given a ridiculous self
serving reason to recall a drug and the stock has a nice drop and they're
rubbing their hands in multiple comparison glee like yesterday in the big pharma fish.
Steve Winter, the author of these modifications of
the application of Hart's strategy for war games et al is to be complimented for
a nice analysis. He emphasizes at the conclusion the importance of sowing
confusion, dislocation, and surprise in the enemy's field by planning what
you're going to do in advance and after the battle. Perhaps market
participants mite keep such a check list at hand before the market battle each
day, updating it frequently for leads as to how to keep the market mistress on
the wrong foot.
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