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My Book Reviews

Category: Trader autobiography
Published: 1997
Read: 1998
Reviewed: Jun 2010

Victor Niederhoffer is one of the most famous hedge fund managers in history. In this autobiography, he gives readers detailed stories from his youth and shows how his upbringing led him to become a speculator. He talks about: growing up in Brighton Beach (a section of Brooklyn), his relationship with his father and grandfather, his years playing squash (he was the national men's squash champion for many years), and attending Harvard.

The book's content revolves around a couple of central themes, mainly "make sure to test your theories" and "be an independent thinker". He talks about his market theories, and makes observations about various market phenomenon, such as the relationships between different markets, and the ecology of markets. He also extracts lessons from different areas of life and relates them to market speculation and price movements. Some of the associations he makes are obvious (sports, games, gambling) and some are not-so-obvious (music, sex, the weather). He also sporadically talks about his association with George Soros.

He also goes off on many tangents which may or may not have value to speculators. There were a couple of stories which I appreciated, including his essay about Willie Sutton. Between the time I first read Speculator and the time I wrote this review, I read Willie Sutton's biography and have an enormous appreciation for Sutton's concentration and preparation, and how these qualities relate to being successful at any endeavor, including speculation. Here are some other interesting topics and quotes from Speculator:

  • "I know players who would rather lose than think; many of them do."
  • "My resistance to conformity has been the bedrock of my speculative persona."
  • Soros: "You're only as good as tomorrow's trade."
  • "Many games are won by players that are smart; many games are lost by players that are too smart."
  • "Speculation, like most activities, is an art-science. Attempts to answer the pivotal question of speculation invariably raised twice as many questions as they solve."
  • "Life tends to optimize rather than maximize."
  • George Soros' audit of Niederhoffer was an interesting anecdote.
  • Brokerages are a good contrary indicator for the market. Brokerage failures (like banks) are a sign for market bottom and brokerage earnings can be a market trend indicator. Buy when brokerage profits are low, and sell when they are high.

Overall, I didn't like this book as much as I anticipated, which is disappointing because it is clear that so much effort went into writing it. It wasn't because Niederhoffer later blew up. I don't believe in down-grading a trader's theories just because they blew up. I also won't join the other critics who complain that the book doesn't teach you how to trade. Since it is a biography, this wasn't the book's purpose.

There were a few small criticisms I had. First, he gives some biased advice when he recommends that you never short stocks. Then he calls technical analysis "mumbo-jumbo" even though there has been some research (ironically, the kind that Niederhoffer recommends doing) that shows that technical analysis is legitimate. He also takes an unjustifiably condescending jab at the psychological studies done by college professors and students by calling them "contrived experiments". I myself find these experiments fascinating and think they contribute to the burgeoning understanding of the all-important area of decision theory.

Niederhoffer also commits one of my biggest pet peeves by perpetuating the "crazy trader lifestyle". He talks about staying awake for 54 hours straight to trade currencies and, another time, bringing in a screen to watch his trading while his wife was in labor. Not only do these examples reinforce the inaccurate perceptions of how professional traders operate, but the effects of Niederhoffer's melodrama are amplified by his eccentric personality and pretentious writing. As a result, this leads many impressionistic readers to believe that this kind of eccentric intelligence is a required trait to be a successful trader. At three different times, I have seen readers make statements to the effect of, "if he can't beat the market then I have no chance." As an everyday trader who tries to trumpet the idea that an average person can become a successful trader, I am disappointed by these kinds of comments.

I had a couple of problems with the book as a whole. First, even though the book is true to its title, there is still surprisingly little talk about Niederhoffer's personal trading. Any references he does make to his market research and individual trades were sparse and isolated. One could argue that his withholding of any tangible information about his results and profits was a purposeful attempt at forcing readers to judge the value of his ideas based on their own merit, and not to take the shortcut of valuing them based on how much money they made. But this supposed quest for meaningful dialogue, in my opinion, doesn't explain it because, despite being involved with the markets in some capacity for about 30 years, there was no talk at all about his overall evolution as a trader. But aside from his trading, he also doesn't share any meaningful information about his personal life. Even though there were plenty of detailed stories about his father and grandfather, he doesn't really reveal any insight into how his relationships influenced his thinking and personality. So despite the fact that the book is very detailed and personal, it still doesn't feel very candid. I agree with another Amazon reviewer who said that it "reads like a mystery novel without a resolution". At times, it even seems like he is purposely toying with readers by being coy. He keeps his readers at arm's length, but then occasionally lets them have a look through the keyhole. For example, when Oscar Schafer asks him, "Are you still doing that up-and-down Friday-Monday stuff you used to, or have you progressed?", he replies:

"The action on Monday might be particularly bearish after a Friday that acted less favorably than the norm. The conjunction sounds so simple, but I calculate that the basic ideas made my immediate and extended family of customers a substantial nine figures."

But instead of being an authentic moment, this seemingly off-the-cuff reference to nine-figure profits, combined with his general evasiveness about his trading, only serves as his passive-aggressive way of hiding the details of his trading results, while, at the same time, subtly reminding everyone that he is a trading God. Furthermore, in this case, his openness about his results was done for self-serving reasons (to retaliate to Schafer's condescending comment) rather than to open up to his readers. The rest of the book is similarly infused with Niederhoffer's ego. He seems to be self-aware of this at times, and strategically employs a self-deprecating tone to mask an undercurrent of superiority.

Another overall problem I had with the book was with Niederhoffer's theories. Many of the relationships he illustrates between various subject matters (like music and sex) and market price movements are not actually relationships, they are merely similarities. Pointing out similarities like these isn't particularly difficult (for example, I think there are connections to be made between linguistics and reading the market but I'll write more about that later sometime). Since market behavior is simply an extension of social behavior, you could find similarities between the price movements of markets and almost any human phenomenon. But just because a perspective is interesting doesn't mean it is valuable. And I get the feeling that many of this book's admirers may be confusing the creativity of his theories with the validity of his ideas.

Another problem I had with his theoretical work was that I didn't understand how it actually fits in with his trading. He spends so much time polishing and refining his abstract concepts, yet he makes his money based on statistics-driven research. The key question is, why does he do this?

One possible legitimate explanation is that he uses his creative side to come up with macro ideas while using more practical research at the trade-level. Soros is someone who does this very well. Soros is a "concept trader" who has created various mental constructs, such as his "theory of reflexivity", and has used these theories to profit from various opportunities. However, I don't think that this explains it because you can see how Soros' top-down theories are connected to his specific trades, most notably the British Pound trade in 1994. He gives examples of these connections in Soros on Soros. On the other hand, Niederhoffer's bottom-up research isn't connected to any of his overarching theories. Niederhoffer's tireless effort and relentless desire to mine different markets for mathematical relationships indicates (to me at least) that he is a statistics-driven trader at heart.

The real underlying motivation for doing all of his theoretical work might be to find a deeper meaning in his trading. This desire could be driven by a couple of possible motivations - one genuine, and one not. And I'm not sure which one is true. The genuine explanation is that he loves markets and wants to break new intellectual frontiers for the purpose of furthering the general understanding of how markets operate. But my instinct tells me that this is not the reason. Because despite all of the intellectual and emotional energy he has spent on the markets, nowhere in the book do I remember him stating that he actually loves markets or loves trading. Although this omission is not blatantly apparent at first glance, its absence becomes unavoidably noticeable once it is pointed out. For him, markets seem like an obsession, but not a passion - and it is not likely that someone would be driven by such altruistic motives if the passion wasn't there.

The not-so-genuine reason for Niederhoffer's theoretical work (and the more likely explanation, in my opinion) is that he wants recognition and intellectual validation. He isn't happy with being seen merely as a trader who has successfully milked the essentially arbitrary statistical abnormalities within the market. He wants to be seen as the John Forbes Nash of the trading world - someone who will be credited with discovering the "governing dynamics" of the markets. This explanation makes sense since he spent time in academia (a place where a person's worth is almost solely defined by the intellectual recognition of one's peers) looking to the academic world to validate his work. Academia, by the way, is the single most illogical place for a trader to ever want to be because it isn't possible for a trader's worth to be measured by the subjective opinion of people. A true trader knows that the market's opinion is all that matters, and doesn't care what other people think.

His need to get intellectual recognition for himself spills over into a need to get intellectual recognition for trading in general. His habit of getting overly-philosophical seems like a way of trying to intellectually justify trading. These attempts, combined with Niederhoffer's abstract style, seemed to cloud the book's purpose, which confused and put off many readers. One Amazon reviewer wrote, "it's as though he is trying to intellectualize his profession, as if just making money is vulgar; he's staking a claim for traders in the pantheon of artists." After considerable deliberation, I disagree that Niederhoffer is staking a claim for traders as artists. I think the reason why he relates trading to the higher forms of art in society (music, philosophy, etc) is because those are the arenas of life where human nature manifests itself most purely. The same can be said about markets, since the process of trading (i.e. the conflicting duality of intellect and emotion, and the confluence of individual behavior and social behavior) is one of the most human of endeavors. I do, however, agree with the reviewer's statement that Niederhoffer is trying to intellectualize trading - and I find nothing wrong with this. Traders suffer from unfortunate stereotypes which result from an underdeveloped understanding of markets, which stems from (not to digress too much) the ignorant premise that market behavior is a hard science and not a soft science. Markets, which are essentially a concurrent expression of individual and social psychology, are an intellectually valid and meaningful field of study because they lead to valuable insight into basic human behavior. I believe the reason that so many readers have such dissonance about this book is not due to Niederhoffer's attempts at intellectualizing markets. It is due to the fact that his attempts at intellectualization are incomplete. Although his idiosyncratic observations about markets are indeed valuable, his ideas are very fragmented. Personally, I didn't mind this. But I think most people were bothered that he made no effort to tie them up into a cohesive whole, which is what the field of behavioral finance is currently doing.

Niederhoffer's need for validation seems to manifest itself in every aspect of his life. He fancies himself a Renaissance man who studies everything, from literature, to history, to music, to philosophy. But most of these efforts come off as fake, including, at times, his effort to be a trader. The casual, jovial tone he uses throughout the book gives readers the impression the market is more like a toy that he likes to play with - a mere a curiosity at best and a vehicle for recognition at worst. His jovial tone is in stark contrast to the hardened tone that most veteran traders acquire as a result of the battles they have fought (and the emotional beatings they have taken) in the markets. Hence, his nonchalant attitude leads to situations where the big risks he takes (and consequently, the large loses he endures) are not really a concern to him. Although he intellectually comprehends the seriousness of his meltdowns, they don't seem important enough to motivate him to re-evaluate himself. His attitude about blowing out a billion dollar account is like a skateboarder who understands that he can fall and crack his head open but doesn't really care. I wonder, though, what this ultimate indifference is based on. One Amazon reviewer pointed out that he "takes faith in the synchronicity of Nature as though it can save him". This attitude leads Niederhoffer to allow the market to determine how much money he makes, instead of relying on his own ability to act. Another reviewer believed that Niederhoffer's constant overleveraging indicates that he lacks basic trading skills. This could be a valid explanation. In response to his failures, Niederhoffer stated (outside of this book), I am going to keep going, for better or worse." This makes me wonder whether another explanation could be that all of Niederhoffer's classical studies has convinced him that his losses turn him into some kind of tragic, romantic figure. Regardless of the reason, there seems to be an unhealthy level of passivity in his trading which leads to systematic failures.

Based on his shortcomings (i.e. his lack of passion for trading, his need for intellectual validation, and his lack of trading skills) that have led to multiple terminal failures, one could argue that he shouldn't be managing other people's money. One could even further argue that it would be best if he didn't trade at all, and that he should simply be an analyst who does research and analysis in a strictly advisory role. In response to these questions, I think Niederhoffer needs to do two things. First, he needs to reflect on the basic question of why he trades. The answer to this question will determine whether or not he actually wants to be a trader. Assuming that he does, then I think he should discern between the different skills needed to be a trader vs. the skills needed to be an analyst - because they are very different. He then needs to figure out if he is able to - and wants to - acquire the skills which he doesn't currently have. If he decides that he doesn't want to be a trader then there is nothing wrong with this. Tom DeMark is someone who has built a stellar reputation as an analyst based on his intellectual work in the field of market analysis. Niederhoffer on the other hand, seems to be determined to push forward despite any shortcomings as a trader. This path, while obviously worrisome, is not necessarily a doomed strategy. Jim Rogers is someone who has openly confessed that he is a bad trader. When Rogers worked at the Quantum Fund, his role was to be strictly an analyst, with Soros being the trader. Yet, Rogers has been able to maintain a successful long-term track record - despite exhibiting the same trademark stubbornness that Niederhoffer shows.

Much of what I am writing about Niederhoffer is admittedly conjecture, but since he is being so open yet deliberately elusive, he is begging to be analyzed. Unfortunately for me, this was the most difficult review I've ever had to write. Niederhoffer's opaque style forces readers to process his words in order to extract their meanings - but I don't mean in a philosophical way in which one ponders the deeper issues of life. His impenetrable exterior leads to a fog of confusion which leaves readers feeling frustrated, confused and shortchanged. In my opinion, Niederhoffer had the opportunity to make "The Education of a Speculator" one of the greatest trading books ever written. Anyone who has read the popular article written by John Cassidy in 2007 about Niederhoffer in the New Yorker ("The Blow-Up Artist") sees how much valuable information and lessons he has to share. If only Niederhoffer didn't try to sound so profound, and had fused his undeniable intelligence with equal parts vulnerability, then maybe this could have been a reality.

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