Cover of "The Education of a Speculator"

Cover of The Education of a Speculator

A word on Victor Neiderhoffer

Education of a Speculator was the first real investment memoir I had the pleasure of reading. It wasn’t the first book written by a former fund manager I had read, that credit goes to Peter Lynch and his One up on Wall St. Upon completing that book I felt that I could trade stocks successfully. However at the time my interest in the market was developing, being a long-term investor just didn’t make sense, nor did it fit in with my goals of creating mountains of cash over the next couple of months. That’s where Education of a Speculator comes in. To think that I came across it unintentionally, and wouldn’t have read (and re-read) it had I not been intrigued by the title.

Backtesting

Prior to any investment or speculation you should challenge your rationale for putting that money at risk. This was a radical concept to me. It didn’t matter that I didn’t have a MonteCarlo simulator or access to the CRSP (Center for Research into Stock Price  at Graduate school of Business University of  Chicago) I started to sit and contemplate possible scenarios that would present pricing anomalies and then go and look for the data to prove my theory. As a scientist first comes up with a hypothesis and then tests that hypothesis to find truth, a trader no matter what he’s trading must if they want to survive, backtest their basis for investing.

Understanding Market Dynamics

The best way to understand how the market works is to go to your local zoo and go to the big cat exhibit at feeding time, ou will see that the lil kitty who looked so warm and cuddly just 2 minutes earlier is now ready to battle to the death for his piece of the pie. Same is true of fund managers.
There are a million reasons for a seller to sell and a buyer to buy, most of these reasons fail to take into consideration that the involved is supposed to be maximizing his expected utility, and as a result the product being bought or sold has its true value distorted just a little while longer.But there exist in every market no matter how liquid or illiquid extremely rational and ruthless participants who are there to take your savings and your soul while leaving you thinking that they did you a favor. It’s evolution on a micro-scale. The strong survive and the weak well the weak continue to give their earnings to the real players in the form of 401K contributions.

Understanding that the  person on the other side of the trade is there to basically take your money should motivate you to make sure that your trade is as close to a sure things as possible.

Random or Non-Random

So if the market is indeed random and the Efficient Market Hypothesis (E.M.T.) is accepted as if it came down from on high, how can one profit, state with any certainty that something is highly probable or improbable. That’s always been my problem, it would make it easier as a trader if we had the answer to these questions. But this is a debate for academics. As a trader it is your duty to come up with a road map that will lead you to profitability. At the end of the day what really matters is how much money you have in the bank not whether you were on the right side of an academic debate. The only way to increase your time in the market and the amount of money you have in the bank is to trade high probability events. The only way to do guarantee that outside of inside information is to  back test your theories. Do not try to make the data fit to your hypothesis unless you want to be stuck listening to Cramer instead of trading against Cramer.

Depth

I didn’t go as in-depth into some of these topics as I really wanted to. I really wanted to touch on Brownian Motion, Fractals, and Hemline analysis (it’s based on a theory that you can gauge the market based on the length of a woman’s skirt). I will in future posts my goal here is to ease you in to understanding the intricacies of the market and the debates among participants.

http://www.dailyspeculations.com/wordpress/,

http://www.wiley.com/WileyCDA/WileyTitle/productCd-0471249483.html,

http://en.wikipedia.org/wiki/,

http://blogs.wsj.com/financial-adviser/2010/02/25/ten-things-i-learned-while-trading-for-victor-niederhoffer/

 

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