A good speculator is a lonely man

MUMBAI: What does it take to become a successful speculator? It is likely that everyone would have a different answer to this question. But, Victor Niederhoffer has a very interesting take on this. In the preface to his book, The Education of a Speculator, Niederhoffer writes, “Join me in seeing how humdrum everyday experiences, combined with the wisdom of immortals, can help you appreciate and maybe even learn the nitty-grity of buying low and selling high.”

He elaborates: “Successful speculations arise naturally from the ordinary, simple and humdrum events of life. Games, music, nature, hoodoo, horses, and sex are great teachers. The successful speculator expedites a current price to its inevitable level. The techniques of expediting - and its cousin, hustling, are useful in all fields.”

The point being made is that a successful speculator has to put his everyday experiences to good use.

And Niederhoffer doesn’t believe that studying what other successful speculators have done in the past is of any help. “If I did hold an “open sesame” to the markets, I wouldn’t share it. There is ample opportunity to use wealth in this world, and neither I nor my friends, nor anyone else I have ever met, has so much of it that they are interested in putting themselves at a disadvantage by sharing their secrets. This would only cast their “edge” into oblivion and return them to being mere mortals who struggle for their daily bread. Man cannot live by bread alone, but it helps if others don’t bake it using your recipe.”

This explains to a great extent why interviews of successful fund managers and investors tend to be very boring and do not go beyond the fund manager saying, “Individuals should invest for a long term in fundamentally sound stocks.”

And listening to such individuals on television at times can be hillarious. Most such gurus keep coming up with predictions that have a very high probability of success. “One elementary variant can be seen in the newspapers daily: a guru makes sentient observations on what happened and then gives a three-legged forecast, “There is not a consensus on whether the market will go up, down, or be unchanged tomorrow.”” What they basically mean is that it will be bullish unless until it’s bearish.

For Niederhoffer, trying to follow others amounts to voyeurism. “Today, when half of the dealers and traders in the world are trying to figure out what Georgre Soros and the Dream Team just might be buying, I look upon their unholy interest as a variant of market voyeurism.”

There is no sure shot way of making money and a speculator is never really satisfied. As Niederhoffer writes, “During my trading career involving many hundreds of billions of dollars and at least 5,000 separate days of entering the fray, I have not had one satisfactory day. When I make money, I always want to kick myself for not being more aggressive. On those all-too-frequent occasions when I lose a dollar, every dollar hurts.” And even with years of experience, a speculator can never really be sure. “No matter how certain a particular speculation looks, there is always a good likelihood that it will go astray. Frequently, things are not what they seem. A deal that seems too good to be true is likely not to be true.”

The book is full of examples of what Niederhoffer has learnt from his good friend and legendary speculator, George Soros. Soros had once mumbled something in his native Hungarian while talking to Niederhoffer on the phone, which when translated into English meant, “The more he talks about his honesty, the faster I count my silver.” Niederhoffer couldn’t agree more: “When someone starts a sentence with “Quite honestly…” or “In all frankness…” I put my hand firmly on my wallet.” The point being, a successfully speculator trusts only his own instincts.

Or, take what he learnt on short selling, which involves the speculator borrowing shares from someone and selling it in the market, in the hope that the price of the share will fall and he will buy it back, thus making the difference as his profit. But, if the price goes up, the shares still have to be bought and returned to the original owner.

Niederhoffer says short selling doesn’t work on most of the occasions. “Soros once told me that he lost more money selling short than on any other speculative activity. My experience is similar. The advice that comes down the pike from authors of stock market doom books - that individual investors should sell short - is a ticket to the poorhouse,” he writes. “The best reason for staying away shorting stocks is the overriding 10% annual return for the past 200 years.” Given this, stock prices are more likely to go up than down and those selling the stocks short are more likely to gain than lose.

Buying low and selling high only sounds simple. It is never simple to execute this strategy and most speculators know that. As Niederhoffer points out, “A corresponding desire to stay in the middle afflicts most speculators, myself included, in their order placement. I am too frightened to buy something in the market when it goes straight down, and too frightened to sell it when it goes straight up. But after it has retracted a good part of the move, I am all to ready.” It is comfortable to be with the herd in the middle. Niederhoffer quotes what Francis Galton wrote some centuries back: “The vast majority of persons have a natural tendency to shrink from the responsibility of standing and acting alone. They exalt the vox populi… even when they know it to be the utterance of a mob of nobodies.” More than anything else, a good speculator needs to be a lonely man.