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| | The Speculator
Are you an investing predator -- or prey?
Crocodiles dine on complacency, lions dine on fear -- and the markets dine on those who see no lessons to be learned from the animal kingdom.
By Victor Niederhoffer and Laurel Kenner
Talk about deception and camouflage, about being faked out of your boots by a market move. It happens all the time, but the moves around month-end for bonds and stocks, the two major markets in the financial world, were classics.
Generally speaking, last days of months are good for bonds, while first days of months are good for stocks. As June turned to July, the norm held. Bonds looked like the best thing in the world on the last day of June, and stocks looked like the best thing in the world on the first day of July.
But everybody who said: Oh, an easy way to make money. Buy bonds on the last day of the month, stocks on the first day! had their pockets turned inside out as July turned to August. The table illustrates the guile in the moves of these markets:
| As the month turns | | Bonds | %chg | Stocks | %chg | | June 30 | 0.6 | July 1 | 0.5 | | July 31 | -2.2 | Aug. 1 | -1.0 |
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How to keep from becoming prey to such dupery? We reached into animal lore and the survival techniques of the oldest recorded civilizations, on the theory that todays hunters -- traders and investors -- might find a proper footing there.
Crocodile in wait
One thing we came up with is an investment lesson straight from the crocodiles: Never try the same trade twice in a row. As Vic learned on a trip to Africa and Australia, crocs lie in wait for prey where theyve caught previous meals. Wildebeests are often victims of reptilian recall. Out on the African plains, a migrating herd that makes the mistake of crossing a river at the same point two consecutive years is likely to be waylaid by the same crocodiles that dined on wildebeest there the year before.
Vic visited two crocodile farms and several zoos and aquaria where they were featured, talked with zookeepers and read a few books. He found that crocodiles learn well and have great memories. Apparently the crocs cerebellum is quite large relative to its brain, for a reptile. On a visit to the Australian zoo, he learned that many crocodiles there hate Steve Irwin, TVs "Crocodile Hunter," more than other keepers. They remember that he captured them. Crocodiles lie in wait for zookeepers in the same place they enter each day, and they can tell one keeper from another.
As a result, Vic can verify that a good fisherman should never fish in the same place twice, as a crocodile can remember where you were. He will be swimming submerged through his territory and mapping out a plan of attack in case you come too close to the water. Similarly, it is advisable never to trade the same way in one week that you did in another, as humans have incorporated all the wisdom of the crocs through their written language and lore.
Readers with croc-like memories might well ask why the Spec Duo, who regularly tell them to remember Robert Bacons "Secrets of Professional Turf Betting" and avoid switching strategies, now seem to be recommending exactly that. The answer is that Bacon was warning about switching after losing trades in a never-ending chase for the elusive profit. What were talking about here is switching after youve won.
A 3 million-year strategy
Crocodiles, so successful at taking advantage of other creatures that follow routines, are themselves very much creatures of habit. For the last 20 years, African crocodiles have nested on the same day, Sept. 14. The regularity of this crocodilian rite resembles that of another highly successful survivor on the other side of the world: the horseshoe crab.
During a kayaking trip at Cape Cod, Laurel learned that these unassuming crabs have survived in their present form for 3 million years, and she took home some lessons in survival:- Optimize. The female horseshoe crab lays eggs only at the highest of high tides, at full moon in May, June and July. She leaves the water and climbs to the highest point on the beach, where the eggs are safest from predators.
- Compete. Each male has a large claw used solely to hook onto a female as she climbs up the bank. As many as four or five males will ride along with one female. At the top of the hill they all do what needs to be done to fertilize eggs.
- Build immunity. A horseshoe crabs shell has no cracks or holes or gouges, because it is so good at healing itself. So potent is the crabs immune system that scientists use its blue, copper-based "blood" in medical tests for detecting all sorts of viruses and bacteria. In investing, immunity corresponds to paying attention, cutting losses, keeping adequate reserves and staying away from crocodiles.
Lion in the wind
"Jock of the Bushveld", by James Fitzpatrick, is a South African classic that describes a bull terriers birth, hunting, companionship and death, a la "Call of the Wild." Jock is the smallest and ugliest of the litter, but he refuses to stay down when toppled. The other dogs quickly learn to let him eat what he wishes. His owner is a tracker, hunter and transporter who becomes the director of a major mining company after Jock helps him bring a wagon of supplies to the Transvaal gold rush. The book describes how a dog learns from noticing the behavior of its enemies. A passage about lions contains much wisdom:
"We had a lot of trouble that night, as one of the lions persistently took his stand to windward of the cattle to scare them with his scent. It is a favorite device of lions, when tackling camps and outspans, for one of them to go to windward so that the terrified animals on winding him may stampede in the opposite direction where the other lions are lying in wait."
Now we ask, if lions can do it, why cant humans in the market do it? And while it fits, we dont mean the exemplar is George Soros or Paul Tudor Jones buying a little to test the market before selling a huge amount, or the floor trader running stops or breaking the round number before taking it back big the other way. We dont mean the kind of move where the S&P 500 ($INX) breaks the opening range on the downside by 5 at 989 and then goes to 1,003, getting other traders to stampede on the buy side only to be eaten by the bears lying in wait on the other side. What we mean is the way the market can lure you into complacency, say with gold down a bit or a series of up Fridays, while the lions on the other side are waiting for the kill.
A noble death
When Jock grows too old to hunt, he becomes the guard dog at a supply house (always the best way of making money in a boom). He dies a noble death, mistakenly shot by the owner while defending the goods against a pack of wild dogs. To avoid a like outcome, the Spec Duo is retiring from our column as of Sept. 3. We enjoyed writing our 180 consecutive columns for MSN Money. Most of all, we have enjoyed the ideas, encomia and critiques from our readers.
There are so many things we would have wished to write about, and we are composing an appropriate farewell in the tradition of Don Quixote. For the benefit of our readers, we will try to tie up all loose ends on our site at www.dailyspeculations.com, and we encourage last-minute queries and salvos to us via e-mail.
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