THE EDUCATION OF A SPECULATOR
CHAPTER 1
Brighton Beach Training
This drama unfolds on the handball courts of Coney Island, where people drink lime rickeys on the boardwalk, a knish toss from the center of the one-wall handball universe. Michael Disend
The Brooklyn Reader
The Losers
Where the city ended, I began. In 1943, I was born at the southern edge of the underdog capital of the world, Brighton Beach, Brooklyn. The mere mention of the name is traditionally good for a raised eyebrow, a snicker, or a joke. A town of second fiddlers, where "da Bums," the Dodgers of baseball, were revered.
In a typical Brooklyn touch, the Dodgers didn't win a modern World Series from the annual event's inception in 1903 until 1955. They lost seven times along the way. Then, two years after finally beating the Yankees in 1955, the team moved to Los Angeles. Ebbets Field, their former home and originally the site of a garbage dump, was torn down and replaced with a housing development. In a typical Niederhoffer touch, I bet on the Dodgers to win the pennant in 1951, when they were ahead by 13 games. Bobby Thompson's homer in the playoff game relieved me of my funds.
The Brooklyn Dodgers took their name from the locals' need to dodge around the world's largest trolley system or perish. The no-fare kids riding on the back edge of the trolleys learned to jump off before the route got too close to the police station, where they risked receiving a clubbing. Brooklyn during that era was a town of cemeteries, breweries, congestion, change, rebels, losers. No war movie of the era was complete without a clip of a heart-of-gold kid from Bensonhurst, chewing gum, bumming a cigarette, and speaking in Brooklynese. Nor would a play about a move from Manhattan be complete without the lament, "Now I'll have to go back to Brooklyn." No wonder that a Society for the Prevention of Disparaging Remarks Against Brooklyn claimed 40,000 members and counted 3,000 slanders in 1946.
The edges of civilization attract a fringe element. Brighton had more than its share of the downtrodden, beach bums, gamblers, hustlers, invalids, lost souls, low lifes, peddlers, and street musicians. But mainly Brighton welcomed families-working stiffs whom the elevated subways deposited on the frazzled edges of civilization for a day of baking sun, cheap and cacophonous revelry, and then a nickel's ticket back to endless drudgery.
The Little People
Brooklyn's legendary street games taught me how to survive. On a typical Sunday in 1951, I'm watching "the Milkman" play a big-money game against my 12-year-old Uncle Howie. The stake is $50, held under a hat by "Louie the Lion." The Milkman calls a time out. He looks overhead. Thunder clouds loom, the humidity's high. He needs to break to take a shower. There are no rules on duration or frequency of time-outs, so a fight breaks out with the referee. The referee is diminutive Sam Silver, half the size of the players. Sam affects a style borrowed partly from Tomashevsky, the great Yiddish actor and the Charlie Chaplin of Yiddish theater, and partly from Bill Klem, a legendary baseball umpire who believed that the guy in the 25-cent bleacher seat is as much entitled to know a call as the guy in the boxes. Like the wrestling referees of today, Sam frequently ended the games black-and-blue. But these beatings were real, and Sam often had to run for his life when the players chased him off the court.
After three hours of delay, the storm the Milkman is waiting for finally comes and all bets are returned. Howie and I lose our bets.
Some 41 years later, it happens again. It's April 13, 1992. I'm holding a short bond position that I plan to get out of at the close. But a water-main break in Chicago floods the Chicago Board of Trade. Trading is canceled for the first time ever, and by the time the Exchange opens for a full session three days later, I'm down 100 percent on my equity. Whenever I hear the expression "Sometimes you win and sometimes you lose," I always add, "And sometimes you get rained out."
I've learned that around volatile announcements, such as the employment figures and the Consumer Price Index (CPI) number, another outcome is possible-a dead heat. Market orders to buy will be filled at the high of the day, and orders to sell will be filled at the low, leaving me dead on my margin regardless of my direction.
On the street, we stop to admire an Oldsmobile. The owner jumps out. "I'll sell it to you for $100. But it costs you nothing. I got a sure thing at Belmont which I'm going to bet the whole stack on and you're in for a 5 percent carry if you get me the cash before the daily double." We come up with the money, the horse wins, but we don't recoup because the car breaks down on the way to the track.
Often, in my speculations, dealers call me with a bargain. They just happen to have some off-the-run securities left over from an unrelated swap of short-term into long-term paper.
If I buy it now, it costs me nothing because the dealer provides 0 percent financing for two weeks. By that time, I'll doubtless be out with a profit. A moment after I buy it, a massive offering of that off-the-run security hits the street, and I'm down 50 percent on my equity before I can hang up the phone.
The nicknames of the tanned and wizened people I grew up with tell their story: "Bitter Irving," "Bookie," "the Animal," "the Martian," "Rugged," "the Indian," "Nervous Phil," "the Ganef," "the Barber," "the Butcher," "the Milkman," and, of course, "the Refugee." Brooklyn consistently led the nation in number of immigrants arriving and homes built.
In short, I grew up with the little people of Kasrilevka immortalized by Sholom Aleichem in Fiddler on the Roof: Stuck away in a corner of the world, isolated from the surrounding country, the town stands, orphaned, dreaming, bewitched, immersed in itself and remote from the noise and bustle, the confusion and tumult and greed, which men have created about them and have dignified with high-sounding names like Culture, Progress, Civilization. But transformed by the many mirrors of poverty to [Brighton Beach].1 These little people were cooled by the healthful breezes and salt air of the Atlantic Ocean, which were then wafted 10 miles northwestward to be rebreathed by the high financiers in the towers of Wall Street. They, in their rarefied aeries, thought they breathed the sea air first; but it had already been staled and soured by the whole, wide miasma of Brooklyn. "In much the same way," wrote Herman Melville, "do the commonality lead their leaders in many other things, at the same time that the leaders little suspect it."2 This was true of Brighton. The bird or squirrel or chickweed knows, from the drop in pressure, that a storm is coming. We have to wait until the raindrops splash against our windows. The denizens of Brighton, living on the edge of life as well as on the edge of land, knew, from the sudden drop in income, that the crunch was on. The financiers had to wait until the stale news appeared in The Wall Street Journal.
Manhattan and Wall Street seemed miles away when I was growing up. Brighton was the Harvard of my education as a speculator. The games, bargains, music, sex, and fauna taught me to appreciate the earthy and nitty-gritty. That's the proper foundation for buying low and selling high, the trade of a speculator.
A Brighton Pedigree
After the First World War, my paternal grandparents, Martin and Birdie Niederhoffer, were experiencing financial reverses in their residential real estate business. Forced to cut back on their lifestyle, they discovered that the Brighton Beach area, with its inexpensive housing in apartment buildings and its proximity to the Atlantic Ocean, would reduce the family's living and vacation expenses. Their son Arthur was born there in 1917.
My maternal grandparents, Sam and Gertrude Eisenberg, were following doctor's orders by settling in Brighton Beach. After a critical thyroid gland operation, my grandmother was urged by her surgeon to seek out a healthful, iodine-laden sea environment in which to reside. Their daughter Elaine was born in 1924.
My parents met in 1939, when Elaine was made editor of her high school newspaper, The Lincoln Log. One of her co-editors was Jane Niederhoffer, who liked to bounce homework assignments off her erudite brother, a football star at Brooklyn College. My mom soon became a regular at these study sessions; romance was born, and eventually so was I, exactly nine months after Elaine and Artie were married in 1943.
Artie was the kind of guy we all meet once or twice in a lifetime, one whom everyone loves and respects. The character in mythology that most resembles him is Balder, the Norse god of light and beauty. He was brave, wise, just, sincere, simple, and generous, the kindest and gentlest of gods.
Artie received his L.L.B. from Brooklyn Law School in 1939 and was admitted to the New York State Bar in 1940, but he was unable to find employment as a lawyer in the still depressed economy. After eight years of the New Deal, the unemployment rate stood at 18 percent. Needing work, my dad decided to join the New York City Police Department in 1940.
A great salary of above $1,000 a year, and a fine pension, plus the job security, made police, fire, and sanitation department jobs seem like real plums. When New York decided to hire 300 new policemen, more than 30,000 would-be applicants lined up to take the test. Artie scored in the top 100 and joined the police force as a patrolman stationed in the Coney Island area. He supplemented his salary with jobs as a night watchman and by loading The New York Times onto delivery trucks. Eventually, he resumed his studies at Brooklyn College and NYU, and gained a Ph.D. summa cum laude in sociology. After 20 years' service, he retired from the police force with the rank of lieutenant, and became a founding professor of John Jay College, the criminal justice unit of the city university system. His books, The Gang (which Artie characteristically allowed his Ph.D. adviser to claim senior authorship for), Behind the Shield, The Ambivalent Force, and The Police Family are still considered classics in their field.
Artie and Elaine settled in Brighton Beach in a small, art-deco apartment one block from the four major landmarks of Brighton: the private beach, the boardwalk, the elevated train, and the massive 75,000-square-foot, brick Public School 225.
The jewel of the beach was a "private" club, Brighton Beach Baths. Dating back to the days when mogul Joseph P. Day was developing the area as a roost for gamblers and dandies, this one patch of "PRIVATE" beach was my personal oyster.
For the next 25 years, Artie and Elaine spent most of their nonworking hours on the beach. The sandy beach of Brighton extended 100 yards from the ocean and ran for one mile before being met by the rich people's Manhattan Beach on the east and the carnival-and-fantasy beach of Coney Island on the west. Brighton, in its benevolence, permitted the poor to enjoy the same air, luxurious views, fine cuisine, and opportunity for sport as the rich. The three miles of adjacent beaches, with their fresh salt air, gentle surf, light reflecting off the smooth sand and churning waters, open spaces, sightings of luxurious ocean liners sailing away to exotic lands, and views of the sun setting over the sea provided a panorama that the richest potentate could not have found wanting. As for food, no king's palate ever delighted in delicacies tastier than Mrs. Stahl's knishes, Lundy's oysters, or Nathan's frankfurters, all served in restaurants near the beach, or the Humorettes, celrays, lime rickeys, malteds, egg creams, hot pretzels, kishke, and waffles on sale in the ubiquitous candy stores surrounding the beach. If a communication was urgent, the telephone at the candy store served as well as the private postal services of the nobles or the carrier pigeons of Reuters or Rothschild. As for sport, paddle tennis and handball on concrete were Brighton's version of lawn tennis and squash. Little people play their racquet sports against concrete walls and on cement floors, not on slate and grass. They hole their putts around obstructions of papier-maché windmills rather than on the well-manicured greens of Augusta or Pebble Beach.
The Boardwalk
The boardwalk still runs like a stream from the shtetl that was Brighton, curving gently past the handball courts, alongside the Aquarium, and on to wondrous Coney Island. The old parachute jump from the '39 World's Fair dominates this spot like some ancient symbol of the universe. The sun slowly sinks beyond the endless ribbon of the boardwalk, culminating in a great burst of gold. Soon, only the shimmering necklace of light that is Coney remains, rising out of the welter of bodies, the waves, and the reflections of things past.
Underdogs have a tendency to look surreptitiously and guiltily at those above them. Repeatedly, short stories and remembrances about Brooklyn record voyeurism underneath the crisscrossing planks of the boardwalk, or beneath the crests of one of the roller coasters, so it seems to have been a vivid part of the primal Brooklyn experience.
I chased the filtered light [running below the boardwalk], played games with it: cutting it up, throwing sand on it. . . . Tired of that, I zigzagged between the pillars, my heart pounding, looking up through the thin spacings between the boards in search of ladies who left their underwear home, an Indian, stalking his prey.
Worse than the voyeurism were the activities alluded to in this characteristic passage:
Underneath the secluded, dapper netherworld below the boards were taking place other activities, more intimate ones, which required the special shaded privacy that the boardwalk afforded. Some called it the hotel underworld.
In a legendary incident in family history, Artie caught a young relative (not me) taking part in an indiscreet intimate activity with an adult. He beat up the adult within an inch of his life.
I am not as strong as Artie. But when brokers take the orders of my customers and "bag" the trades in the shaded privacy of their booths rather than in the ring, I sometimes find it difficult to refrain from giving the offenders a tongue-lashing.
I didn't go in for voyeurism. I found it degrading, even as a kid. Today, when half of the dealers and traders in the world are trying to figure out what George Soros and the Dream Team just might be buying, I look upon their unholy interest as a variant of market voyeurism. Instead of overhearing conversations, rummaging through garbage, anticipating actions from telephone rings, positioning sentries at the elevators, attending seminars with a guru, or visiting Delphic oracles to find out how to succeed, they should get out in the sun and do something invigorating.
On the sides of the boardwalk, there were families and workers, and those who will never work. They washed up on the rocks, recumbent, wet, and warmed. They luxuriated in the sands, intimate, almost naked. Three million beachgoers in two square miles on a sunny July 4 can get crowded, but there was always room for two more.
The sky might darken suddenly against the silvery waters. A deluge of rain or wind led to a panicked exodus from the beach. In the most primordial vaults beneath the boardwalk, shivering and sandy, most of the mob waited out the crisis. Some streamed out through the streets of Brighton and went back to little apartments within large buildings of impressive Moorish design, with lobbies decorated with proud sailing ships. I would use the opportunity to rush into a cafeteria and hustle a few nickels in a game of five-card stud.
In winter, the crowd huddled on beach chairs, wrapped up against the coursing winds. The "polar bears" plunged into the Atlantic. My parents retreated to play paddle tennis, sheltered by the high concrete sides of a drained triple-Olympic-size pool.
The Brighton Cycles
Brighton's fortunes, like those of most other beach communities, suffered through frequent and ever-changing cycles. At the turn of the century, the area was a retreat for the wealthy. Brighton, among its other distinctions, was the horse racing capital of the world. It boasted three racetracks: Sheepshead Bay, Gravesend, and Brighton Beach. Exclusive hotels such as the Brighton Beach, the Manhattan Beach, and the Oriental catered to the rich and naughty. Coney Island's Feltman's Ocean Pavilion Hotel, where the frankfurter was invented, had nine separate dining facilities, each with its own private band. Well-known speculators, such as Diamond Jim Brady, the Vanderbilts, the Belmonts, and Leonard Jerome, "put on the Ritz" on the boardwalk before driving their trotters to elaborate champagne and quail dinners. Entertainers such as Jimmy Durante and Eddie Cantor performed at music halls crammed with revelers and the overflow from the track.
But that era ended when gambling was declared illegal in 1910. The racetracks were converted to speedways and then to housing developments, fueling the many years when Brooklyn set a record for new-home construction.
The automobile helped to democratize Brighton. The rich could travel to more secluded areas. The establishment of direct public subways to Brighton in 1920 enabled the borough's masses to reach their own beach. Rides, franks, watermelon, and malteds were all priced at five cents each. Brighton became "the nickel empire" rather than "the rich man's paradise." Millions took the subway to the beach each sunny weekend. What they needed first were bathhouses. By the end of the Roaring '20s, there were 30 bathhouses, all linked by the boardwalk.
Running at right angles to the beach was a massive series of wooden and metal beams, up to 30 feet high, that held the decaying wooden track of the Brighton Beach and Coney Island subway lines. Bungalows and apartments in the neighborhood rumbled and shook every ten minutes as the trains made their way out to Coney Island or back to Manhattan.
Underneath the elevated trains was a strip of open-air fruit stands, bakeries, delicatessens, restaurants, and discount apparel stores. Every three years, these stores went through a cycle ranging from 100 percent occupancy to 90 percent vacancy. Brighton ("Little Odessa") is now mainly populated by Russian immigrants, but the stores still invite customers.
The worst market crash of all, in 1929, brought the Great Depression, which lasted until 1946 and scaled back Brighton once again. My paternal grandfather, Martin, was wiped out during the Depression. He routinely speculated in real estate and stocks during the Roaring '20s with an equity of 5 percent of the market value of his holdings. Like many others, he was able to withstand that first 200-point crack, when the Dow went below 200 in November 1929. Then, after tottering ominously for a year, the Dow fell another 75 percent to 50, in May 1932, and Martin was buried alive many times over. He became a kind of Don Quixote thereafter, eternally searching for the stake that would support his rise again, while remaining vigilantly ahead of the rent collector. Fittingly, he read Don Quixote in Spanish and committed it to memory to drown his sorrows. He and his ilk were known as "dead ducks" on the street.
His saga was the classic Brighton experience. After some hairbreadth escapes, he and his wife Birdie settled on Brighton First Street, the last street on the Brighton side of the Coney Island border, in a $25-a-month, 400-square-foot apartment. With this exposure to changing fortunes ingrained in me by my heredity and environment, I guess it's natural for me to tend to play a defensive game in my speculations.
Brokerage House Bellwethers
I try to protect myself from sucker plays in the market by waiting to buy until things look really grim. Blood in the streets isn't enough. Nathan Rothschild said he liked to buy when the cannons are firing, and sell when the trumpets are blowing. That's good enough for him but not for a weak hand like me.
I heard those cannons on the streets of Taiwan in March 1996, when the Chinese lobbed some missiles in the direction of the April 1996 Taiwan presidential elections. The analysts attributed it to an attempt to drive the Taiwan stock market down. It was good for a 7.8 percent one-day decline in Hong Kong stocks and a 5 percent drop in Taiwan. I immediately sought shelter in some Chinese mutual funds. Within a week, Taiwan began to rise whenever the missiles were launched. During the month after the missiles, Taiwan was the best performing stock market of all.
When the Titanic sank, a "spine-chilling chorus drifted across the water-a mixture of cries, screams, and shouts. It was the most nightmarish sound imaginable."5 When I hear the "thunderous roar and hiss of escaping steam" from the market, followed by the "long continuous wailing chants" as magazine articles proclaim the end, I know it's time to jump in. As the Japanese market reeled from the aftermath of the Osaka earthquake and the Barings failure in mid-1995, flirting with 15,000 on the Nikkei, a certain magazine ran one of its notorious cover stories forecasting fair value at 8,000. Brokers were in disarray. I knew then that it was every man for himself, and I rushed into the fray.
The wholesale failure of brokerage firms during a panic is often associated with market bottoms. The bottom of the 1995 slide in the Nikkei came in conjunction with the collapse of Barings and Company. At the bottom of the 1987 crash, the market had teetered precariously on its edge with every vicissitude in the profit and loss that U.S. investment bankers faced on the British Petroleum underwriting. Noted investor and Barron's roundtable participant Jim Rogers likes the comfort of complete collapse, as memorialized by the closing of a stock market, when he buys. In early 1996, he indicated he was building up a line of Pakistani stocks because the Pakistan stock exchange had just been shut down. As of mid-1996, Pakistan's up about 35 percent.
Gerald Loeb recounts a story illustrating the other side of the equation. His brokerage house was swimming in luxury at the height of the 1929 crash. When Loeb traveled, his stock dealings were by no means curtailed.
During these times, Mike Meehan, the famous speculator and floor specialist in the high-flying RCA stock of 1929, opened the first office on a steamer-the North German Lloyd luxury express liner Bremen. I sailed on her for Europe in early October 1929. I think it was the maiden voyage of the seagoing board room. At least, so far no firm has opened an office on a plane.
I was not immune to the optimism of this period. I laid the groundwork for a stock market country club. . . . Fine brokerage offices were other straws in the wind. We built a showplace in Palm Beach. The interior wood was all weatherbeaten and genuine, collected along the Atlantic Coast. We had a patio, a fountain, palm trees, of course, a real fireplace, and two or three cars to lend just in case a client needed some transportation . . .
Shortly thereafter, Loeb formed and quickly sold out an offering for a brokerage house in a golf country club. The crash of 1929 came before he could collect the subscriptions. Loeb recommends selling stocks when brokerage profits are at highs and buying them when brokerage houses are in the red.
There was an interesting daily double of broker-stock interactions in conjunction with the stock market panic of July 1996. In the first place, Hambrecht & Quist, one of the leading underwriters of technology and healthcare issues, announced that it would be filing an initial public offering. Some income statement numbers tell the exciting story:
Six-Month
Yearly Results*
1991 1992 1993 1994 1995 1995 1996
Revenues $81.8 $125.5 $110.5 $119.3 $220.0 $86.8 $204.5
Net income (9.9) 9.7 15.3 15.9 49.4 18.5 47.6
*Amounts in millions of dollars.
No sooner had the announcement of the filing been made than the NASDAQ Index plummeted over 15 percent. In late July, the market rallied and the issue was refiled.
In the second race, a broker jumped out the window and killed himself as the Thailand SET Index registered a decline of 30 percent over the previous two months. My partner in Thailand, the very knowledgeable Mustafa Zaidi, immediately called me, "Victor, I thought you'd want to know." Based on his information, I lucked out. I doubled my Emerging Tiger holdings. In the next three trading days, the SET Index gained 5 percent.
Although Loeb's sensible words of advice have a ring of truth, the problem is that too many things sound reasonable and can also be supported by anecdote. As the Dow ricocheted up and down 100 points a day at the beginning of 1996, several newspaper articles made the case that the market was in strong hands because brokerage house profits were high and "as is well known, these have to fall before the market drops." What good is such advice and how can anyone tell the good from the bad without data or recurring principles?
Lessons from Livermore
From an early age, I have been very cautious about accepting seemingly sensible advice. Martin, my grandfather, had the luck to be taken under the wing of Jesse Livermore, "the Boy Wonder" of Wall Street in the early 1900s. The two of them often traded together at bucket shops on New Street. Afterward, they frequently repaired to the music district where Martin doubtlessly introduced Jesse to pretty young things (a fatal proclivity of the Boy Wonder) at Waterson & Berlin, Irving Berlin's original firm, where Martin was Chief Financial Officer.
Martin idolized Livermore, as though the Boy Wonder were a blindfolded chess player or a composer without a keyboard. Livermore often traded stocks by the sound of the ticker tape, without seeing the prints. Yet Jesse was humble ("The only thing a man should do when he is wrong is cease to be wrong"), flexible ("There is a time for all things"), and selective ("You can beat the market in grains but not the grain market").
When the Boy Wonder had one of his superior insights, he had no hesitancy about going for the jugular. During the 1907 crash, a delegation from the Big Board had to beg the Boy Wonder to hold off his shorting because the stock market itself might cease to exist under his relentlessly accurate selling. Sensing, like Soros at a much later date, that it was in his own self-interest to allow the market to survive ("I'm a player in the market also"), he generously covered his shorts at the bottom.
So prudent was Jesse that he took account not only of his own potential weaknesses, but those of an all-too-devoted wife:
After I paid off all my debts in full . . . I put a pretty fair amount into annuities. I made up my mind I wasn't going to be strapped and uncomfortable and minus a stake ever again. Of course, after I married I put some money in trust for my wife. And after the boy came I put some in trust for him.
The reason I did this was not alone the fear that the stock market might take it away from me, but because I knew that a man will spend anything he can lay his hands on. By doing what I did my wife and child are safe from me.
More than one man I know has done the same thing, but has coaxed his wife to sign off when he needed the money, and he has lost it. But I have fixed it up so that no matter what I want or what my wife wants, that trust holds. It is absolutely safe from all attacks by either of us: safe from my market needs: safe even from a devoted wife's love. I'm taking no chances!
Livermore's insights are so timeless in their wisdom that I have collected some of them in Table 1-1. They read like a compilation of nuggets from one of the market magician books that are so popular today. Funds supervised by the best of these magicians are currently sold to the public today. Unfortunately, new tricks are always required to stay on top.
The only problem with Martin's reminiscences of the Boy Wonder's genius was the omission of a crucial fact. Jesse had gone bankrupt at least three times before the 1929 crash. He put his last chips in during the early 1930s and was wiped out. He flitted around Wall Street for another ten years, trying to scare up another stake. Finally, near the wolf point, he tried to recoup by selling a book of his insights. When that failed too, he gave up, penned an eight-page suicide letter at the Sherry-Netherland Hotel, and blew his brains out in the hatcheck room in 1940.
I have always found it wise to take Wall Street adages, maxims, and advice with a grain of salt. The best way to taste plausible theories, like those of Loeb and Rogers regarding brokerage houses, is to quantify, test, and analyze them rigorously.
The first thing I did to test the brokerage profits theory was to collect monthly prices for Merrill Lynch, the largest U.S. brokerage house, from the time it was listed on the New York Stock Exchange (NYSE) in 1972 through year-end 1995. Next, I computed the firm's monthly and yearly returns and compared them with the S&P 500. For example, in 1995, Merrill Lynch rose from 35.75 to 51, a return of 43 percent. The S&P 500 in 1995 rose from 459 to 615, a gain of 34 percent. Merrill Lynch thus showed an excess return of 9 percent. If Loeb's theory is true, then the excess returns should be an inverse predictor of future S&P moves.
The correlation between Merrill Lynch's excess return in a month and the S&P return in subsequent months is a positive 0.05 for each of the next seven months.9 When Merrill Lynch does well, the S&P subsequently tends to perform better, and when Merrill Lynch does badly, the S&P worse. After the ten largest excess monthly returns for Merrill Lynch, the S&P gained an average of 3 percent in the next six months. After the ten largest excess monthly declines for Merrill Lynch, the S&P declined 4 percent in the next six months. Unfortunately, at least as far as Merrill Lynch is representative of brokerage stocks, there is no support for the inverse hypothesis as it relates to monthly returns.
But one interesting finding did emerge. The excess return of Merrill Lynch in one year and the S&P change the next year were correlated at 20.3. There were five years when Merrill Lynch's excess return was 30 percentage points or more. In the year immediately following three of these years, the S&P declined. The odds in favor of a decline in those years were 3 to 2, compared to 2 to 15 in the other years. The odds ratio of 11 to 1 suggests that, for yearly returns, brokerage house fortunes are a negative harbinger. Figure 1-1 shows the relation graphically.
Racquet Training
I seem to have been born with a racquet in my hand. The earliest photographs of me show that my favorite crib and carriage toy was a ping-pong paddle. I attended my parents' paddle-tennis matches as soon as I was old enough to crawl, and this formed my introduction to sports.
The paddle tennis courts at Brighton Beach were taken down during the winter months, but hardy players, including my parents, continued their matches at such times by stringing up a net in the empty but sheltered cavern of the adjacent triple-Olympic-size swimming pool. Arthur and Elaine were among the stalwarts who, shielded from the cold blasts off the Atlantic, would pound the ball back and forth only 100 yards from the shoreline.
With their net set up in the shallow end of the pool, they would place me in the deep end, and the five minutes it took me to crawl up the cement slope to where they were playing would give them time to play a few points. Each time I reached them, they would return me to the deep end-an early Sisyphean experience that was no doubt a harbinger of my future efforts as a speculator. When their match was over, Mom would toss the ball to me while Dad helped me hold the wooden paddle. With the ball in play, he said, "Hit!" and guided me through the motions of a perfect forehand.
I often think of those abortive attempts when I enter the box for yet another day of speculation. 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, every dollar hurts. Why didn't I have the sense to stay away? Better yet, I wish my father were alive to show me the markets, sizes, and directions of the perfect trades.
The "toss and hit" drills, begun at the bottom of the swimming pool, eventually moved to a real tennis court. I have continued this tradition with my six daughters, only now with more up-to-date equipment-one-quarter-size racquetball graphite miniracquets. But, my kids and I are opportunistic. In August 1995, after almost being buried by some insider trading by various governmental officials, I beat a hasty retreat to the icy climate of Vinalhaven, Maine, to join a family reunion. I knew it would be too cold to play tennis, so I didn't bring my racquet. But my three-year-old, Kira, insisted on playing tennis anyway. "Daddy, I can use a frying pan to hit," she said. The incident would have evoked a "Vickie, you have another champ coming along" from Artie, but in his absence-in his honor, perhaps-it will invoke a smile from my readers.
By the age of six, I was too skillful for my peers. To win nickels in betting games, I had to play with my left backhand or spot my opponents 15 points a game to even out the odds. At an early age, I learned how to bounce back from initial adversity. Even more important than bouncing back was not getting in the hole at the start.
I took my lessons here from Whitlow Wyatt, a Brooklyn Dodger ace hurler during my youth. His three rules for staying ahead are as good for speculators as for baseball, racquetball, and handball players:
Never let down for a moment. You can't, to be a consistent winner. Pitch to every batter as though [you] were facing him the first time. That helps make you careful.
The second rule is to pitch to every hitter as though you were trying to keep him from getting a long hit. That makes you cut corners or watch weakness more carefully. The third idea I keep in mind is that no matter how low a batter's average may be, you cannot afford to show him too much of even your Sunday pitch or he'll hit it.
During the speculating day, I am frequently distracted with divertissements that tend to make me let down. To minimize them, I don't take phone calls, break for lunch, or allow visitors. No signing checks and, especially, no shuffling of those infernal tax and regulatory forms that fill up so much of the average businessperson's workday. These distractions would no doubt cause me to throw in the towel. When Wyatt's rules aren't enough to shield me, I think of another great baseball player of my youth, Ted Williams. When he found that the fuss about his August birthday was distracting him unduly from his batting .400 plus, he simply changed the date of his birthday to October. I do not have the natural flair or wisdom of some traders, or the research skills of others, but I excel in concentration and focus.
I continued the tennis practice sessions on all sorts of courts with my parents throughout my youth. One of the keys was playing every day in the winter at the Coney Island courts on Neptune Avenue. We would bring a shovel to clear the snow, and wear gloves when the temperature dropped below freezing. Unfortunately, I never became a good tennis player. My greatest achievement in the game came when I won the New York City 18-and-under Junior Tennis Championship at the age of 11. My game is on a par with the number-two player on an average college team. I feel and understand all the great shots but simply don't have the skill. It's always humiliating when a friend arranges for me to be trounced handily by a club pro. I feel the same way when a friend introduces me to the promoter of a panacea. I'm in over my head.
The early racquet training was more helpful in squash, where I was fortunate enough to come under the tutelage of Jack Barnaby, the greatest coach in the history of racquet sports. He caught me before I learned the game the wrong way.
My chief idiosyncrasy as I pursued my athletic career was that I practiced against myself four out of seven days. Each day, during these sessions, I would practice one stroke over and over. Almost all other players played matches. First, I'd hit every finesse shot off the forehand side; next, the same shots with the backhand. Then a repetition of the same shots, but starting off the back wall. Ultimately, a game against myself. Mr. Forehand against Mr. Backhand, or Mr. Offense against Mr. Defense. Finally, a burst of wind sprints up and back and around the court until I couldn't take one more step. I kept a diary of these workouts, part of which was published in the book, Smart Squash: Using Your Head to Win by Austin Francis. In looking back over the diaries, I calculated I practiced or played at least one match on 3,500 consecutive days, no exceptions.
The training has been helpful in my speculations. I was honored when I heard my partner, Paul Buethe, tell a prospective customer that I concentrated harder and worked more consistently at my job than anyone he knew.
My model in racquet sports has always been "The Crocodile," René Lacoste. In his brilliant autobiography, written shortly after he won Wimbledon in 1928, and undoubtedly one of the best tennis books ever, he describes how he found himself serving once at Wimbledon's center court while his opponent was bowing and everyone in the stadium was standing. Unbeknownst to him, Queen Mary had just entered the stadium, and the spectators were rising to honor her, as is the custom. The 18,000 spectators at Wimbledon knew the Queen had arrived. Lacoste thought only of his serve.
During the French championships, the Crocodile had a great advantage. Rain was the norm during the tournament, and knowledgeable fans always brought umbrellas to the game. When the inevitable downpour came, the stadium was rife with noise and motion as umbrellas unfurled. This was always good for a few points for Lacoste. His opponents were distracted by the noise, but René, concentrating on the match, had not noticed.
Playing competitive games is especially helpful for would-be speculators. The whole purpose of childhood may be viewed as a window for play. One beautiful thing about play is that if you have an inquiring mind and keep records, you can learn which techniques carry the day.
Hank Shatkin, a veteran owner of a clearing firm on the Chicago Board of Trade and an employer of more than 100 floor brokers in his day, believes that a background in competitive athletics is the best training for future speculators. The floors of the exchanges are studded with former professional athletes. At least eight members in the grain pits of the Chicago Board of Trade are former professional ballplayers for the Chicago Cubs or Bears.
Sometimes, the relations between markets and professional athletes can become chaotic. On Thursday, September 25, 1995, a member of the Chicago Board of Trade, who usually played his games on the bond floor, played hookey from an afternoon session to attend a key Chicago Cubs baseball game. He got so angry when the pitcher, Randy Myers, served up a home-run ball that he jumped on the field and rushed the mound to beat up Myers. Showing a ruggedness that could qualify him for a position as a futures trader in Chicago, Myers calmly wrestled the trader to the ground, pinned him to make sure he held no gun, turned him over to uniformed personnel, and then proceeded to pitch his team to a 12-11 win.
The Finest Gentleman
The athletes of Brighton were proud of their working-class backgrounds. They used their hands on the job and were proud to use them in their play. Handball and handtennis were the games of choice.
The Milkman was invariably tired during morning matches, after crating bottles from a horse and cart for all the neighborhood. Vic Hershkowitz, the best singles player, had an advantage over the other players. He could practice on the job: the firehouse provided a four-wall court for its operatives. Moey Orenstein, the best doubles player, also had a training advantage: it was rumored that he served as a runner and collector for major bookies. Artie played doubles with "Rugged," named for his construction-worker hands, and "the Plumber."
The players let off steam during the money games. It was a rare game that didn't have at least two fistfights and three changes of referees. The players always emerged black-and-blue because the rules of the game gave a point to a player who hit a shot and blocked the opponent out without moving. The only defense was to knock the obstructing player senseless with one's body or the ball. Those hard black balls can sting the back pretty smartly when hit at 100 miles an hour from two feet away. Invariably, the games stretched on for hours as the players argued with the crowd and the referees.
Professional squash in the old days was every bit as physical as one-wall handball, basketball, or football. Then a genius came up with the "English Let"-awarding the point to the player who hit the other one with the ball. Immediately, everyone started clearing. Today, squash is a gentleman's game.
I took the English Let rule seriously. Once I was winning 11-3 in the finals of the 1971 Nationals. My opponent was in my way, so I belted him with the ball.
"At 11-3?" he cried out.
"At 14-zip," I responded, and I gave him the kind of look that good collectors use to expedite payment. I still get that same rush when dealers back out of a trade after quoting me a firm market. There are always at least three direct lines in my office taped up so that brokers who recently transgressed can no longer ply their trade with me. The impact on my wealth is as small as it was in my squash game. But I uphold the rules of the game and relive my previous greatness.
In sharp contrast to all the other combatants stood a man who called every ball out against himself; a man who never argued, never bet, and always complimented his opponents on their "beauties." Artie was universally acknowledged to be a paragon of sportsmanship.
When my dad and I lost a hard-fought paddles doubles match during which he called our good shots "Out!" over and over again, while our opponents were cheating like crazy, I could not prevent myself from screaming at him.
"Dad, I have to tell you, I had a nickel riding on us in that match and you lost it for me with all your---bad calls against us. You're supposed to be my partner, not the other guy's."
"So what of it. It's only a game. If you need one or two points that badly that it makes the difference, you don't deserve to win. Give the other side the benefit of the doubt, and you'll get the best out of them. You'll feel better also."
I liked to talk to Soros about how great a guy Artie was. One day I spun the "Doubles" story to him. The red-colored hot-line phone between his desk and mine kept us in close touch. George listened and then mumbled something in Hungarian that I took to mean that he felt this was true about me also.
Three weeks later, he launched an audit of all the trades I had ever done for him. "Victor, I trust you completely . . . but because we're so close I thought I should have this done for mutual protection. Now what was the name of that firm you called to change the ticket of that losing trade from your account to mine? Gary, finish this audit within a week and report directly to Curacao." He later translated the Hungarian he had mumbled into the phone as: "The more he talks about his honesty the faster I count my silver."
I guess this skepticism, which he also applies to himself, is one of the reasons that George is legendary. But, the mere fact that I told him this self-serving story about my honesty was enough to trigger his antennae. I must admit that I am the same way. When someone starts a sentence with "Quite honestly . . ." or "In all frankness . . . ," I put my hand firmly on my wallet.
It took me a while to understand what my father said and longer to apply it. But I knew that the idea had taken root 17 years later, in 1966, when I was playing in the Harry Cowles Squash Tournament in the rarefied atmosphere of the sixth floor of the Harvard Club of New York. The English have a tradition of augmenting all of their commonplace activities with a wager. In homage to the English (who could be counted on for at least eight rounds of toasts-"God save the Queen!"-at the pretournament banquets), the tournament was highlighted by a "Calcutta auction" the evening before the semifinals, following the banquet. In this auction, each semifinalist was "sold," with the proceeds to be divided between the two finalists. My Uncle Howie and I pooled our resources to buy a share of me.
The next day, my opponent was Bobby Hetherington, an Episcopalian minister from Buffalo, and one of the finest sportsmen I have ever met. He was seeded second in the tournament and after a hard-fought first game, I won it, 15-9. In the gallery sat Uncle Howie, watching his first competitive squash match. After laying off some of his expected winnings, he rushed down to see me between games. "Vic, what are you doing? Of the nine points he won, you called eight down on yourself before the referee even had a chance to call it. If you keep that up, we're a sure thing to lose the Calcutta pool."
"Howie," I said, "That's the way you're supposed to do things in squash. Isn't that how Artie would call it?" I still remember the mixed emotions on Howie's face as he rushed to the gallery to make sure that I got a fair shake and that he had the proper odds in games two and three.
I try to play fair in my dealings. I don't participate in promotions, regardless of how much I can make out of them. While I hasten to add that I am no more honest or dishonest than the next guy, I have made it a practice to give all the calls to the other side-for exactly the reason that Artie stated. The funny thing is, although I've met many businesspeople since then, I've yet to meet one who didn't consider him- or herself honest also-including the worst crooks imaginable. Doubtless, there's someone out there who feels the same way about me. You are not going to make much progress in business if you let the other party know you think he is a crook. You have to get on the court before you go to court.
Control of Temper
Aside from gambling, my main vice as a kid was my temper. When the ref gave me a bad call, I had no hesitation about giving him a piece of my mind. And I hated playing doubles with my dad because we had to win two points to get one up on the scorecard. He would call all my good killers "Chinese"-point for the other side.
After I lost the first game of a money game, I cursed at my adult opponent for blocking me out, threw my racquet at his head, and grabbed the quarter bet out of the hat and ran away with it.
Artie was right behind me. He caught me in the proverbial Brooklyn spot, under the boardwalk. "If I ever see you act in that disgraceful fashion again, I'll take away your ticket to the beach. Go back and apologize right now or you'll get an even worse tongue-lashing than this. In addition to being a disgrace, you just helped your opponent along by losing your temper because he'll play harder now." With that, he gave me a left cross to my shoulder. He was on Brooklyn College's wrestling and football teams. That punch stings 45 years later.
Since then, I have won countless matches where my opponent stormed at the referee, thereby dissipating his own energies.
As a speculator, the easiest fall guys for my mistakes are the floor traders who execute my orders. It is tempting to take out my wrath on them when I lose money, especially if the loss has been exacerbated by a poor execution. Time and again, they come up with some lame excuse for a bad fill that I know conceals terrible moral turpitude on their part. But "my shoulder still hurts" when I open my mouth, and the maximum invective that I ever disseminate to some pitiful clerk is something like:
Hi, Doc Niederhoffer here. Just wanted you to know that there are no words in the English language strong enough to describe the incredible improprieties of what you just did to my client. He's incensed and undoubtedly will be canceling his account and bringing an action against me and my agents forthwith. Humbly alert the broker and the head of your clearing firm, as well as all employees in between, not to be surprised if a process server appears at their homes imminently.
Because I often lose money in a trade-purely, of course, as a result of bad broker execution-my brother, Roy, has programmed the computer to deliver the above message via voice synthesizer, along with appropriately demoralizing inflection and rhythm. On one occasion, our currencies broker on the IMM responded to the computer synthesizer, "At least it's good to hear from you personally, even if it's only to hear of our mistakes."
"Well, that's the kind of guy I am," Roy typed into the computer.
In this regard, I have never found the antics of John McEnroe at all unusual. Such tantrums were de rigueur for all of the handball players at Brighton. I recall the time when Jack Kramer threw his tennis racquet at the referee in a California 13-and-under tournament. He was delighted to see his dad walking over to the referee. "Finally," he thought, "my dad's sticking up for me by going over to the ref to give him a piece."
The next thing he heard was the referee announcing, "Game and match, Smith. He wins, 4-6, 4-3, default." Jack's father then walked over to him, grabbed the racquet, and broke it over his knee. He informed Jack that he would not be playing for the rest of the summer, and, furthermore, if he ever disgraced himself in that way again, he would never play another tournament. Jack once remarked to me that this was the last time in his great competitive career that he ever argued with a referee. I believe the training Jack and I received was better suited to a successful career in speculation, or any other field, than the training that apparently leads so many pro athletes to dis their opponents with utter impunity.
Economy of Motion
Every night, at the end of Artie's 4 p.m.-to-midnight shift, we went through a little ritual. He brought home some coffee danish from the Sea Breeze Bakery, along with a pint of Breyer's banana ice cream from the local candy store.
After the feast, Dad would sit by my bed and we would discuss the things that young sons and fathers talk about most-namely, sports. To be the best at something consistently, Dad said, you had to be economical, using the least amount of input to accomplish the greatest output. Take Marty Reisman, he said, whom we had recently seen playing Dick Miles in a high-stakes money game at the legendary Lawrence ping-pong club on Broadway at 54th Street.
Marty had a consummate stroke. He scraped directly through the ball on his backhand, like a blackjack dealer flipping a card on the table, and on his forehand he spun the ball upward in a salute. Because both sides were equally good and perfectly balanced, he was always ready to return an angle or drop shot. He once went through 50 matches without once being caught by a drop shot. And he frequently defended from ten feet behind the back edge, especially against his nemesis, ten-time U.S. Champion Dick Miles. Marty's accuracy and the controlled force of his drives were his trademarks. He once finished a quarter-final match in the 1949 World Table Tennis Championship in Stockholm before the game being played at the next table, which had started at the same time as his match, had finished its first point. To be fair, that first point on the adjoining table lasted 20 minutes.
In tennis, Ken Rosewall had that same economy of motion and directness that all champions seem to have-Fred Astaire in dance, Michael Jordan in basketball, Sam Snead in golf, Gayle Sayers in football, and Sugar Ray Leonard in boxing. The written descriptions of the performances of these widely varying great champions frequently contain similar terms: completely effortlessly, never breaking a sweat, smooth as silk, floating like a butterfly.
A typical panegyric to poetry in motion is a description of Josh Gibson, perhaps the greatest home-run hitter in baseball history (whether Babe Ruth was the white Josh Gibson or Josh was the black Babe Ruth is moot), by his first manager, Judy Johnson:
It was just a treat to watch him hit the ball. There was no effort at all. You see these guys now get up there in the box and they dig and scratch around before they're ready. Gibson would just walk up there . . . .
After the talk about economy in motion in sports, my dad turned to Emily Dickinson's poems. "But Dad, she's a poet," I protested.
"Yes, but every athlete would do well to study the economy of her expression, the sharp impact she gets from words, that builds inexorably to a whole," he replied. There were indeed several athletes who frequented Brighton Beach and were spoken of in terms of "poetry in motion." Vic Hershkowitz never had to dive for a shot. He was always in position, and his natural left and right, blazing at 100 mph, enabled him to take the direct path to each shot, rather than having to favor a weak side, the way athletes with a dominant side inevitably and inartistically must play.
"Vic, your main problem in racquet sports is your frilly stroke. Your backswing has a wide arc. You pivot with a military about-face on your cross-court drives. And you end your follow-through with an accelerating flourish, climaxing in a complete stop, with your racquet face saluting the flag. You jump to reach maximum altitude on your serves, and you seem to love to retrieve lobs passing over your head while playing the net, or while running toward the baseline, through the legs. Take it easy. Stay close to the ground. Get on the balls of your feet. Be compact. Get rid of all the folderol and concentrate on the basics. Keep your eye on the ball. Move your racquet to the same place as where you want the ball to go."
I am reminded of my weaknesses and the proper solution when I'm playing squash. The front and back walls serve as an echo chamber. Whenever anyone says anything in the gallery, I can hear it, regardless of how softly it is spoken. When someone new to squash is invited by an aficionado to come and watch me play, within a few seconds of the start of the match comes the inevitable: "That's Niederhoffer!?? He moves like an elephant!"
I try to compensate for my awkwardness by giving myself a good margin of error on all my shots. I always aim at least six inches above the tin, unlike my adversaries, who love to shoot an inch above the tin in a do-or-die effort to win the point outright or lose if it catches the tin. I do the same in my speculations. I never buy a market up on the day or sell one down on the day.
On one occasion, I heard something more flattering from an oldtimer. "When I see big Niederhoffer play at first I think he's awkward, flat, built like a tackle. But he reminds me of Honus Wagner, the best that ever played baseball. Could play any position, stole 700 bases, led the league in batting eight times. The kid's a natural. I just hope he doesn't ruin it with that temper. He should learn from Wagner, who had the sweetest disposition in the world."
I did learn to control that temper, through losing lots of matches in college when I argued with the referee and hit my hand against the wall in disgust. In each of the fields I have played in, I have needed every unit of energy I possess available for output. All waste gives my competitor an edge. Except for naturals I have run into, such as the Marty Hogan in racquetball, or Babe Ruth in baseball, or George Soros in speculating, I have never seen a success in any field who didn't have some internal mechanism for economizing on energy at work at all times.
Some Lessons from Willie Sutton
On October 3, 1951, I was observing Yom Kippur. While atoning, when the rabbi turned his back, I was secretly listening to the final playoff game for the National League pennant, between the New York Giants and the Brooklyn Dodgers. I had 100 percent of my net worth staked on the Dodgers with Bookie, who was atoning close enough to my radio that he could cover any late-breaking bets.
The pennant race in 1951 came down to the last game of a three-game playoff between the Giants and the Dodgers. Howie was a Yankee fan, but he felt the Dodgers were a shoo-in to win. Dodger ace Don Newcombe (20-9 on the season) would be taking the mound at the Polo Grounds. And Brooklyn had administered a 10-0 licking to the Giants just the day before. Uncle Howie didn't believe in grinding. "Bookie's the only one that can do that," he'd say. "He has the edge." So my Uncle Howie bet his entire net worth, $800, including $2 of mine, on the Dodgers. The Dodgers were ahead, 4 to 1, in the bottom of the ninth. Howie and I were counting our winnings.
We snuck out of Yom Kippur services to catch the play-by-play on our hidden portable radios. And then the tide changed. Alvin Dark singled for the Giants, and Don Mueller followed with a single of his own, which moved Dark to third. But then New York's leading RBI man, Monte Irvin, fouled out. Minutes later, Whitey Lockman hit a stand-up double, moving Mueller to third and scoring Dark. Ralph Branca came in to face Bobby Thompson with two men on and the score 4 to 2. Holding our breath, we pressed the radio to the ear, covering it with a yarmulke. Thompson hit the second pitch into the stands for a home run: 5 to 4 Giants. Next thing, Russ Hodges was screaming into his microphone: "The Giants win the pennant! The Giants win the pennant!"
Howie and I went from riches to rags in five minutes. At the same moment Howie and I were in such dejection, a wealthy handball and chess player was drowning his sorrows in a Borough Hall bar. That sorrowful man, likewise a rabid Dodger fan, left as little to chance as any of the great heroes. He planned, studied, and analyzed every aspect of his equipment and trade before taking a risk. I am referring to the greatest entry and exit man in history, Willie Sutton, the famous bank robber.
Willie had recently escaped from a Pennsylvania prison and was hiding out in an apartment in a mainly Puerto Rican neighborhood near Flatbush and 4th Avenues in Brooklyn. As always, Willie planned his strategy in advance. He taught himself Spanish while in prison. He knew that his neighbors would read only the Spanish-language papers and hence would be unlikely to see his "wanted" photos in the major New York dailies.
The day the Giants upset the Dodgers, Willie was watching the play on television (he avoided the stadium, knowing how many off-duty cops would be there). Later, he wrote about that game:
I saw Bobby Thompson hit his home run off Branca in the final 1951 playoff game in a tavern a block from Brooklyn police headquarters . . . . As I watched Thompson circle those bases I felt like going into headquarters and giving myself up. I don't think I've ever felt more depressed in my life. Being a Dodger fan shortens your life by years. Even when they win, as they did in 1952, they worry you half to death.
Now if that ball game had such an effect on Willie, causing one of the greatest bank robbers and prison-escape artists of all time to contemplate turning himself in, imagine the impact on ordinary mortals like Uncle Howie and me. In modern times, it has been posited that the performance of the leading Japanese baseball team, the Giants, has a similar effect on the Nikkei stock index. When the Giants are on a roll, a bullish trend in the Nikkei is likely. Probably no baseball team in the United States today is revered the way the Brooklyn Dodgers were in the 1950s or as the Giants are now in Japan. It would be interesting to study the impact of the Chicago Bulls' wins and losses in relation to U.S. Treasury Bonds traded on the Chicago Board of Trade.
Willie Sutton exemplified the rule that "Success in any endeavor requires single-minded attention to detail and total concentration." Willie would spend weeks and months casing a bank before robbing it; he would dress in a cop's uniform. His disguise was so perfect he would find himself answering complaints from passersby and directing traffic.
Subsequently, my dad showed me a few pages in Willie Sutton's Where The Money Was. Willie memorialized his training methods:
I enjoyed playing the different roles. I was always so wrapped up in any job I was planning that as soon as I put on a policeman's uniform I felt like a policeman. The car would usually be parked a block or two away, and while I was strolling to the bank I'd automatically check the doors of the shops with my eyes. From time to time someone would stop me to ask directions. On two separate occasions, motorists asked me if it would be all right to leave their car in a no-parking zone for a couple of minutes-they were just going to run in and pick something up. I lectured them severely. How could they ask a policeman for permission to violate a city ordinance? "Now if you happened to ride around the block," I told them, "I might not be here when you got back."
. . . While I was crossing a busy intersection in Philadelphia in my uniform . . . I was hailed down by a police cruiser. A captain got out and bawled the hell out of me for having a button loose on my collar. I felt just awful about it-yes, sir, you're right, sir; an absolute disgrace, sir-not because a police officer had stopped me right across from the bank I was about to rob but because I was being censured by a superior. I was a very conscientious cop right up to the time I stopped being a cop and started being a thief.
Willie's favorite saying was, "We had a plan." For planning and execution of a bank robbery, most cops think that Sutton's equal never lived. He calculated the risks and always tried to find the weak point in the protection systems set up by a bank. His first robbery, knocking off a department store at the age of ten, was carefully planned. When they put him in prison, he spent every waking minute studying how to get out, either by escaping-by studying architectural blueprints of the prison facilities-or through the legal process-by studying legal precedent. He never went to school, but in the prison libraries he studied psychology, literature, philosophy, medicine, and law. His legal studies finally paid off when he won a pardon after searching for ten years for the legal precedents that saved him long after his lawyers had given up. If you want to be good at speculation or any other job, be as dedicated as Willie.
A Three-Person Partnership
In my youth, two friends and I devised a plan to earn some spending money. The Brighton Beach Baths was adjacent to the public beach. On a national holiday, like Memorial Day or July 4, more than two million people visited the beach. Good Humor boys carried 50-pound boxes of ice cream and ice on their shoulders. Candy stores provided bottles of soda for the thirsty. We formed a three-way partnership, collecting the bottles the sunbathers left on the beach. With the two-cent bottle deposit, on a good day, a hard-working team like Stevie, René, and me could earn $15 or $20 (approximately $300 in today's money).
But there were hazards. If we happened to bother two lovers smooching, we were likely to get a kick in the butt. And after we collected the bottles, we had to store and clean them before they could be redeemed for the deposit. But perhaps my biggest risk in this venture was my choice of partners.
We carried our loot in a cardboard box. One day, tired and hot, my partners and I stepped onto the boardwalk to refresh ourselves with a cold drink and a custard. I held the box while my partners ordered. Daydreaming, I barely noticed that my load seemed to be getting heavier. Next thing I knew, the owner of the custard stand grabbed me by the arm and started yelling "Police!" An officer rushed over.
There, in my box, surrounded by empty bottles, were full bottles of Mission Cream Soda, Hoffman Orange Soda, Vernon's Ginger Ale, and Dr. Brown's Celery Tonic.
"Kid, you're only 8 or 9 years old and already a thief. I hate to think of what's going to happen to you when you grow up. Give me your name so I can fill out a J.D. card and contact your parents."
"But I didn't do it," I explained. "My friends planted this stuff on me."
"Then you better get rid of your friends."
When I told my dad what happened, he told me a little story about a steer that worked in a beef slaughtering operation where he had once had a job. "That steer would climb up the ramp to the killing floor just as if it was the best place in the world. All the other cows and steers would follow him. But somehow he always managed to get lost in the shuffle and slide back to the bottom of the ramp by the time the other cattle had met their doom under the knife.
"You are going to meet many 'friends' like that steer in your day. If you want to live a long and successful life, stay away from types like that. And whenever in doubt, check to see if the friend is along with you at the end of the ramp, the same as he was at the beginning."
The markets also like to play the "Judas" steer. They love to move a few wild ticks in one direction just to induce investors to take a wrong position in stocks. Similarly, the screen quotes in many markets are maneuvered to make the live markets look good. When this happens, the boys in the office all start mooing, "This ramp is beautiful."
Since my early partnership in Brighton I have encountered many "friends" who have tried to lead me to slaughter, typically in some tax-oriented investment. My friend will tell me he's planning to invest his life savings with some operator who is the best in the business. Based on this reassurance and my desire to minimize taxes, I'll rush up the investment ramp. But then, after my funds have been committed, I'll find that my friend has decided not to invest in the deal after all. Not that it wasn't a great deal, of course; it's just that some other opportunity came along and claimed all his funds. The predictable result, nine times out of ten, is total loss of my investment as well as the unkindest cut of all: disallowance of the tax deduction that added the extra return that made the deal attractive in the first place. I have seen more investors lose big after being sucked in by a tax break than almost any other sucker play.
After my partners sold me down the river, they generously offered me a chance to get even in a money game.
The game would be my left and Stevie's right (he was a lefty) against René's two hands-two serves each side. But we would spot him 15 points in a 21-point game. The game was arranged, the money placed in a hat, and a referee chosen. But one problem quickly became apparent-my partner was dumping on me, that is, falling down on me. Whenever he served, he hit two shorts-an out. When the ball was hit to him, he buried it in the floor-Chinese, or point to other side. I chased my partner off the court. It turned out that I was playing against both my opponent and my partner, handicapped by 17 points, since it took me 2 points to figure out what was happening.
I eventually evened the score at 18-all and the match was called. No way were my two adversaries, both much bigger than I, going to let me collect on that bet. But never have I accomplished anything as heroic as that comeback, one against two. I learned things from the experience.
First, "dumping" the game occurs much more often than would appear. There is always some way of setting it up that has a ring of probity. "Now look, young man, do you want to win this game by 50 points and embarrass your opponents and flunk out of college next year, a poor man? Or would you be better off giving the other side a little dignity, slacking off a little, and winning by 40 points and ending up rich?" The "under" bet is looking mighty good at this point.
Second, 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, or, as it was so aptly put by Damon Runyon:
Son, no matter how far you travel, or how smart you get, always remember this: Someday, somewhere, a guy is going to come to you and show you a nice brand-new deck of cards on which the seal is never broken, and this guy is going to offer to bet you that the jack of spades will jump out of this deck and squirt cider in your ear. But, son, do not bet him, for as sure as you do you are going to get an ear full of cider.
Copyright (c) 1997 by Victor Niederhoffer.
Published by John Wiley & Sons, Inc.
All rights reserved. Printed simultaneously in Canada. Reproduction or translation of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States Copyright Act without the permission of the copyright owner is unlawful.
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Library of Congress Cataloging-in-Publication Data: Niederhoffer, Victor, 1943-
The education of a speculator / Victor Niederhoffer.
Includes bibliographical references and index.
ISBN 0-471-13747-2 (cloth : alk. paper)
1. Commodity futures-United States.
2. Brokers-United States-Biography.
3. Speculation.
4. Commodity exchanges-United States.
I. Title.
HG6049.N54 1997 332.6495-dc20 96-30765
Printed in the United States of America
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