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01/20/2006
Briefly Speaking, by Victor Niederhoffer

2006: A Door-Opener Bet

Bookies in Vegas frequently offer special door-opener bets like the following on any basketball game. The team that wins the jump ball at the start of a game is 6 1/2 -7 1/2 to 5 to win the game. I found that the first blow was half the battle in my racquets career and often put everything I had into the opening, starting out with my "hard serve" right at the beginning rather than following the tradition of waiting for the end of the game. Of course, we know that the market version of this known as the January Barometer is most likely complete mumbo, having been wrong so much more often in the most recent years than would be consistent with a true regularity (we will print the Almanatarian's diatribe and critique that the most recent years shouldn't be considered because of the Lame Duck amendment, the war in Iraq, or the cycle at the Fed et al., when he sends it).

However, the time has come to test the insights of the Vegas boys. What are the chances that the market will be up in the last 50 weeks of the year given that they were up in the first two the way they were this year (up 2%)?

The chances that the market would be up the next 50 weeks based on 1981-2005 data were 75%, with an average of 75 points for those 50 weeks. This must be compared to the chances that the market would be up in any 50-week period conditional on the previous two weeks being up. That chance is 80%; However, the expectation for these 50 weeks is a mere 49 points.

The results can be summarized as follows:

               Move the Next 50 Weeks
                      #        % up     Avg chg
First two weeks up    12       75        75
Any two weeks up     718       80        50

As the standard deviations for the last 50 weeks are of the order of 110 points, the results are completely consistent with randomness. However, the 75% to 80% probabilities of a rise might be good to take into consideration.

A Smart Operator

I had dinner with a good dealer friend the other day, and he told me some stories about the smartest operator in the gambling business. It's Jack Binion of the Horseshoe. He was smart enough to move his gambling operations out of the downtown Vegas area some 10 years ago, and find a more desirable location--- the Mississippi riverboat business. Location, location, location -- and timing, timing, timing. He sold out the business for a reasonable approximation to 10 figures a bit before Hurricane Katrina hit.

Jack was the Wal-Mart of the business. The rooms at the hotel were always of the quality of the Motel 6 but the prices were as low as Wal-Mart's. He was as a consequence always able to give the best odds on dice or roulette or poker, and the most confirmed gamblers came there because of this. He was always ready to accept a fair bet of any amount on any game in which he had the slightest of edge whether it was the SuperBowl, dice or roulette for seven figures or more. After all this was his business. But he hated to take a bet for $750,000. If he lost a million, it was great publicity and the handle would increase enough to offset the 49% of the time he lost. But if he lost $750,000 that was just another loss so he didn't get the advertising mileage out of it.

I have always thought that it would be good for the investment banks and dealers and other top feeders in the chain of markets to advertise how much their customers made off of trades because this would be great for business. The British Navy of Thomas Cochrane and Horatio Nelson and Patrick O'Brian was always good at this, ready to fire a chivalrous salute to a enemy ship at the end of a well-fought engagement that ended in a draw. However, I am afraid that the investment banks and dealers are much too like most Vegas dealers, who seem to hate it when you walk away a winner . They at least have an excuse because the dealers have to explain to the pit bosses that they really lost it fair and square and were not in collusion with the players, and this takes time. The dealers always seem disgruntled on the rare occasions you beat them out of a tick or two, from that same malevolence that so often characterizes those that could not fare well in an evenly fought game. I encourage operatives in my shop to follow a trick I learned from The Godfather and my own 12,000-plus competitive refereed matches, and now from the excellent book Buzz Marketing: Always make the adversary underestimate your wins, as this will lower his guard and make him overconfident.

The Importance of Being a Classifier

The book Linnaeus; The Complete Naturalist, by Wilfred Blunt is an excellent book for the speculator to read. In addition to providing a glimpse into the life of a doctor and true lover of nature, it shows you the importance of classification. His classification schemes provided a framework and necessary link for many of the discoveries of Darwin, the entire advancement of botany in the 19th and 20th century, the classification of diseases, and much spicy interest in the sciences from the public. The scientist himself was likeable, lively and romantic in the style of Jim Watson. I liked this letter he wrote to the attractive botanist Lady Anne at the age of 57, whom he had never met:

Nature has never produced a woman who is your equal -- you who are a phoenix among women. Those who fall in love are wont to ingratiate themselves by precious gifts. I enclose a few rare and genuine pearls (seeds) which I have recently collected. Sow them in a flowerpot and place it in your window where it will get the sun. Should I be so happy as to find my love for you reciprocated, then I ask but one favor of you: that I may be permitted to join with you in the procreation of just one little daughter to bear witness of our love -- a little Monsonia, through which your fame would live for ever in the Kingdom of Flora." [The Monsania are geraniums.]

I believe that Jim Lorie and Lawrence Fisher, through their establishment of The Center for Research in Security Prices and their papers on rates of return, played the same role in the classification and codification of security returns that Linnaeus did in botany, and that the explosion of subsequent work in finance; the development of index funds; and a large part of the increase in wealth, the diffusion of stock ownership and standards of living throughout the the world came from their classification schemes. It's one of the reasons that I always recommend starting a study of any market phenomenon with a nice classification scheme, and a good quantitative exploratory description of the data.

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