“The Education Of A Speculator” – Late Review – Part I – “Preface”

(Disclaimer: This is a very unpretentious review. I’m not a professional reviewer. These are just notes I took while reading the book. To publish them in this blog it’s only to help me  to read them again and to organize my thoughts about them.)

Well, let’s start!

“Get out! Like the market, they’re too big for you; you’re in over your head!” The book begins with a scene of Victor Niederhoffer spending his vacation at the summer house of George Soros,  in Shouthampton. The admonition by Soros is still appropriate today to everyone who intend to fight the markets.

Trading has been compared to a fight, while others compare it to a zen-like effort (then effortlessly). I believe it’s both. Niederhoffer was at the beach, facing Hurricane Andrew’s  generated waves. Big waves. We see this on the markets, from time to time. (As a surfer prior to a trader (started surfing at the age of 6), I understand surf (and trading) can be huge effort – and also effortlessly. Riding a wave is effortlessly (a thing only masters such as Gerry Lopez, Tom Curren and the brazilian Fábio Gouveia can do) – but stand at the impact zone, boardless, in the midst of a series of waves requires effort – to save your life!)

“I’m very familiar with how to handle big waves. That’s my niche – going against.”, replied Niederhoffer. “I’m a speculator, and my daily bread depends on reversing big moves. In economic terms, my function is to balance supply and demmand.”

This words get directly to the point: in a free market, the speculator’s work is not only to provied liquidity, but to support balance. And here is were Niederhoffer and Soros disagree: Victor believes in the auto-regulation of the financial markets, while Soro’s believe sometimes Reflexivity overcomes equilibrium and we see a positive feedback environment – therefore needing an external – “supranational”, he says – regulation. As an Ayn Rand’s reader, Niederhoffer seems to believe whe – the humans – have the intelligence to be responsible for our own acts.

The text goes on relating extremes in weather to market movements. “Volcanoes, blizzards, and earthquakes all have an impact on the stock markets and financial systems around the world”.

“The bond and stock markets plummeted, supposedly because insurance companies would be forced to sell bonds to pay all the storm damage claims. Everything is connected.”

“Everything is connected” is really Niederhoffer’s trademark. This thought – this philosophy – appears in everything he wrote. His two books are based in the idea of analogies between every kind of knowledge and the markets. Physics, mathematics, gambling, turf betting, biology, ecology, music, sex, literature, board games, racquet games – you could find market wisdom in all of them. That’s what Niederhoffer did. That’s what this book is all about.

“I don’t intend to unload any of my secret money-making systems here, for reader’s good as well as mine. “

I must say I was shocked here. 444 pages of what, then? As I had bought the two books at the same time (“The Education Of A Speculator” and “Practical Speculation”),  I felt like I had wasted money. “What? No setups? No charts with indicators? No entry/exits?” I was used to the kind of books were trading secrets were no secret.

I don’t know why I continued the reading. But I did. And it was mind-blowing. The result is that Victor, despite not giving for free his own strategies, makes us think about the markets as we never did before. After all, this is a precious gift: teaching one how to think better and be able to develop his own strategies. This is truly the socratic method.

After readig both of his books, I pursued to understand better how Niederhoffer thinks, and what his trading methods would be. It was a gigantic puzzle. Information was scattered, so a “scatter plot approach” was in order. I believe this excerpt below to be the key:

“I am not a great believer in efficient markets, random walks, or rational expectations. My own trading especially refutes these. I trade strictly based on statistical “anomalies”, the analysis of multivariate time series, and the quantifications of persistent psychological biases.”

Wow. His approach is here, to all who want to see. Although he doesn’t give away his particular strategies (the fish), he does give away the way to find them (the fishing pole).  And in the proccess he demystifies current academic economic knowledge, something that always brought him many unfriendly responses.

A final note: This book is really about Arthur Niederhoffer, Victor’s father, a main influence for him. Arthur was a lawyer, teacher and a cop. He gave Victor an education that it’s best described in Victor’s letter to his son Aubrey.

Best Regards to all.