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Niederhoffer Discusses Being Wrong

Niederhoffer Discusses Being Wrong

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Published by: John Aldridge Chew on Jan 25, 2012
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Victor Niederhoffer on Being Wrong
www.csinvesting.wordpress.comTeaching/Studying/Investing Page 1
Read his interview in the New Yorker Magazinhttp://www.newyorker.com/reporting/2007/10/15/071015fa_fact_cassidy Hoodoos, Hedge Funds, and Alibis: Victor Niederhoffer on Being Wrong 
 
Posted Monday, June 21, 2010 11:09 AM | By 
"When you first contacted me about an interview on errors, I made the error of excessive self-esteem. I thought for a second that you thought I was a sagacious personage who had led a not uneventful life that might have something useful to say to your readers. But then when you mentioned [Alan]  Dershowitz ,it came to me in a flash." 
 
Thus began one of 26 e-mails (not counting those dedicated to the logistics of our interview) that I received from Victor Niederhoffer after inviting him to participate in this series. Niederhoffer is a hedge fund manager, a former partner of George Soros, a five-time U.S. Nationals squash champion, and the best-selling author 
 and  
Those successes 
 
notwithstanding, Niederhoffer is best known for two spectacular financial blow-ups. In 1997, a risky investment in Thai bank stocks combined with a dramatic one-day drop in the Dow Jones to permanently close the doors of Niederhoffer Investments. Ten years later, having recouped his losses, Niederhoffer saw his Matador Fund, buffeted by the 2007 credit crunch, self-destruct.
 
Niederhoffer's e-mails suggested a man already obsessed with wrongness. In them, he referenced the statistical concept of path dependence; shared a series of proverbs about the game of checkers (of 5,000 such proverbs, he hazarded, about 250 concerned error); meditated on the difference between Type One mistakes (excessive credulity) and Type Two mistakes (excessive skepticism) (he himself is much more prone to Type One, he says: "I'm tremendously gullible"); observed that "one should be careful of multitasking or multiromancing"; sent me the citations for 
hoodoo
in the 
 Oxford English Dictionary
(a hoodoo is something or someone that brings bad luck); and noted that the harpooner in 
Moby Dick
would have made a great interview subject for this series. Finally, he pointed out that the word 
error
has no antonym. "In retrospect," he wrote, "I know much too much about errors and much too little about the opposite, whatever it is." 
 ***
I've enjoyed getting your e-mails. It sounds like you've thought a lot about beingwrong.
 
 
Victor Niederhoffer on Being Wrong
www.csinvesting.wordpress.comTeaching/Studying/Investing Page 2
 
Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamousfor having made a big, notorious, terrible error not once but twice in my market career.
Let's talk about those errors. The first was your investment in the Thai baht,which pretty much wiped you out when the Thai stock market crashed in 1997.
 I made so many errors there it's pathetic. I made one of my favorite errors: "The mousewith one hole is quickly cornered." That is key. There are certain decisions you make inlife that are irreversible, that lead you into a path you can't get out of, and unless youhave more than one escape clause, the adversary can gang up on you and destroy you.What else? I didn't have a proper foundation. I was not sufficiently private in myactivities. I was playing poker with men named Doc. I must've made a hundred errors onthat one, but those are five or six that come to mind.And then there's the greatest error of all, which is that I had delusions of grandeur.Unfortunately I was so successful for so many years in that particular field that I beganto believe in my own success. I thought that because my method worked in markets thatI knew about and had quantified, I could apply the same methods to something I didn'tknow about. And I had as an example [George] Soros, who would always say, "I madethe most money in things I don't know about."
Did you have a sense that the crisis was coming
a period of dread before theshoe dropped
or did it hit you out of nowhere?
 You know sometimes people describe a situation where they see the grim reaperbehind them, reaching out with his scythe? I was ice skating the weekend before thishorrible crash and all of sudden I started shivering, knowing that if all the forces werealigned against me for one more day, it could lead to an avalanche. I wasn't in thatterrible of shape in the previous weeks and days, but I knew I was vulnerable. I knewthat if my enemy came in with one terrible final swoop, he could cause me disaster.
Who do you see as your enemy in this situation?
The brokers who had the opposite side of the trades and the people on the floor whohad the opposite side of my position in the related markets. They all knew that if I washurting in one market, I'd have to liquidate in the other markets. Whenever someone's introuble, it circulates around Wall Street; you'd be amazed how just one small fish isenough to stop the wheels of commerce for long enough to relieve that person of hisfunds. And then the market goes back to doing exactly what it was going to dobeforehand. I still think that the crash of Oct. 27, 1997, was basically due to brokersrunning my position against me, knowing that I was on the ropes. The market had itsgreatest drop in the previous 10 years that day. And then the next day, once they wereable to force me out, it went up more than it dropped.
 
Victor Niederhoffer on Being Wrong
www.csinvesting.wordpress.comTeaching/Studying/Investing Page 3
 
I've heard that Soros, among others, cautioned you against the Thai investment.Why didn't you listen to the naysayers?
 Well, Soros would be the first to tell you that his predictions are completely random. Henever says anything that doesn't jibe with his current position or his hoped-for outcome.And he's chronically bearish. He's chronically thinking that the world needs a centralplanner to put it to rights and that the market itself is too prone to disaster.
I think a much better view is that the stock market never rises unless there's awall of fear it has to climb. When the public is most frightened, only the strongare left, and that's when the market is in the best possible hands
. I call it taking outthe canes. Whenever disaster strikes, the very sagacious wealthy people take theircanes, and they hobble down from their stately mansions on Fifth Avenue, and they buystocks to the extent of their bank balances, and then a week or two later, the marketrises, they deposit the overplus in their accounts, invest it in blue-chip real estate, andretire back to their stately mansions. That's probably the best way of making money, tobe a
specialist in panics
. Whenever there's panic hanging in the air, that's a great timeto invest.
But I assume that's what you were thinking when you ignored the risk in Thailand,and that didn't work out so well.
 There's no magic bullet that will make you money all the time, but what I said can bequantified and has been quantified and certainly works for the U.S. market. My basicmethodology, which I developed 30 or 40 years ago and which has been widely copiedand stolen and which about the half the industry uses
i.e., that the interrelationsbetween markets are predictive and can be quantified
I happen to believe that thismethodology is quite valid and I still use it today. And every now and then I can keep myhead above water.
How did it feel to be so wrong in such a high-stakes situation?
 It was my first real taste of total disaster. I had pretty much lived a charmed life until thattime. I had won some awards as the best-performing fund the previous year, and I hadnever had a customer lose money with me. I had an unprecedented, too-good-to-be-true kind of record.When it happened, I went through all the stages of grief: anger, denial, sadness,everything. My sister happens to be a practicing psychiatrist, and she said that of the 11symptoms of suicide, I had 10 of them. I was destroyed. I had lost money for mycustomers and that was very terrible. And I had lost my feeling of competence in mychosen field. And I had I lost all my own money, a lot of people were depending on mewho would now have to fend for themselves, so it caused a great spillover of grief, too.

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