Kenner Laurel - Practical Speculation

Table of Contents

Practical Speculation distills an unusual breadth of hard-won (and costly) experience and insight into an immensely readable and instructive book. Bulls and Bears are drawn and quartered alike by the authors exquisitely honed quantitative scalpel.

Stephen M. Stigler
Professor of Statistics
University of Chicago

In my judgment, Victor Niederhoffer is the single most insightful speculator in the world. This new book displays Victors unique gift for recognizing the subtle confluence of seemingly disparate events. Although this book is partially a guide on investment strategy, it is principally a remarkable explanation of market function.

Herbert London
John M. Olin Professor of Humanities, New York University
President, Hudson Institute

Whatever Victor Niederhoffer writes is worth readingnot once but at least twice. His analysis of markets is as brilliant as it is unorthodox. Readers will discover a host of nuggets in Practical Speculation that will stretch their minds and tease their imaginations.

Lawrence S. Ritter
John M. Schiff Professor of Finance Emeritus
New York University

Victor Niederhoffer outdoes himself beginning with the first paragraph of the introduction. Victor and Laurel uniquely see the interrelationships and dependencies among the complex factors that are daily life and are able to interpret observations in terms of how people will react to the sequences of events. Practical Speculation is an extraordinary insight into the thinking of probably the most original thinker of our time.

Kenneth W. Rendell
Founder, Kenneth W. Rendell, Inc.

Vic and Laurel are breathtakingly insightful. They paint on a global investment canvas stretching across space and time. This is their dazzling journey through the art, science, sport, and literature of investing. Dont risk a penny on stocks until you have read Practical Speculation.

Professor Elroy Dimson, London Business School
Co-author, Triumph of the Optimists

A fragment of a wartime speech moved through my mind:
We shall fight them in the fields, and in the streets, we shall
fight in the hills; we shall never surrender. True then for one
people, it was true always for the whole human race.

From My New York by Kathy Jakobsen.

Copyright 1993, 2003 by Kathy Jakobsen. By permission of Little, Brown and Company, (Inc.).

This book was written from the firing line. Most of the ideas were subjected not only to the pitiless judgment of the market itself but also to the critiques, often withering, by readers of our columns for CNBC Money, worldlyinvestor.com, and thestreet.com.

The list of those who helped us accomplish our writing task amid the daily fray is long. Almost everything in this book benefited from the insights of our editor at CNBC Money, Jon Markman. Pamela van Giessen, our editor at John Wiley & Sons, inspired this book and shepherded it through many iterations.

Our thinking was sharpened and augmented by the daily discussions on our Speculators List, a group of extraordinary individuals who read and responded to our columns and then accepted our invitation to join a philosophical e-mail forum in the spirit of Ben Franklins junto. We are deeply grateful to James Goldcamp, who put the list together for us. From an original membership of fewer than 10 people, the Speculators List now encompasses more than 150 experts on diverse subjects, united by a common interest in markets, statistical analysis, and mutually beneficial discussion. Dr. Brett Steenbarger, whose contributions appear throughout this book, was among the early readers who became dear friends. Our thinking and our lives have been enriched by Gitanshu Buch, Henry Carstens, Duncan Coker, Nigel Davis, Mr. E, Bill Egan, Glenn Escovedo, Ed Gross, Bill Haynes, David Hillman, James Lackey, John Lamberg, Paul Lewis, Alix Martin, Mark McNabb, Shui Mitsuda, Bipin Pathak, Tom Ryan, Ken Sadofsky, Dick Sears, Russell Sears, Saurabh Singal, Don Staricka, Gary Tate, Jack Tierney, and Steve Wisdom, to name only a few. There are many other eagles too numerous to mention.

Market Warriors (Artist: Susan Slyman, 2000).

The traders in Vics office contributed research and analysis in addition to their daily duties. Shi Zhang and David Ciocca produced many of the studies and scatter diagrams. Patrick Boyle researched the chapters on physics and Benjamin Graham. Rob Wincapaw located books, letters, and articles with unfailing patience. Gitanshu Buch kept track of a multitude of projects while simultaneously running the trading operation.

Bill Egan, John Lamberg, Gaylen Larson, and Adam Robinson reviewed drafts and made many helpful suggestions.

Rip MacKenzie contributed much of the material for the hubris chapter.

James Cramer at TheStreet.com and Jeremy Pink at worldlyinvestor.com encouraged our early writing endeavors.

We are grateful to Steve Stigler and Jim Lorie of the University of Chicago, and to Lee Henkel, Vics long-time mentors, and friends. Also to Dan Grossman, Vics partner of 30 years, for valued insights and steadfast friendship.

Laurel thanks her music teachers, Aube Tzerko, Bruce Sutherland, and Robert Winter, for teaching an approach to music she has found valuable in all areas of life.

We thank our families for sharing the pain and the pleasure.

VICTOR NIEDERHOFFER
LAUREL KENNER

The Hope Snatchers

Look! You fools! Youre in danger! Cant you see? Theyre
after you! Theyre after all of us! Our wives... our children
... theyre here already! Youre next!

Dr. Miles Bennell, Invasion of the Body Snatchers (1956 film version)

The nightmare is always the same. I am lying in bed, staring at headlines flashing across a huge monitor installed on my ceiling:

In my dream, I am long IBM, or priceline.com, or, worst of all, Krung Thai Bank, the state-owned bank in Thailand that fell from $200 to pennies while I held it in 1997. The rest of the dream is always the same. My stock plunges. Massive margin calls are being issued. Related stocks jump off cliffs in sympathy. Delta hedgers are selling more stocks short to rebalance their positions. The naked options I am short are going through the roof. Millions of investors are blindly following the headlines. Listless as zombies, they are liquidating their stocks at any price and piling into money-market funds with an after-tax yield of 1 percent.