# Smart Wabbits Need Many Holes, from Phil McDonnell

May 19, 2008 |

In our garden we grow about two dozen different varieties of vegetables as well as strawberries and blueberries. Naturally all of this bounty makes for a tasty treat for the local critters. In particular the local rabbit population has clearly been eying our garden as a source of gourmet delights.

Recently I was watching a young spring rabbit running back and forth along a fence. He ran to one end ducked under and then ducked back and ran to the other end and ducked under and ducked back. Each of the holes under the fence would have been unnoticeable to my eye were I not watching him use them. Occasionally the rabbit would make slight improvements to the holes by digging them out a tiny bit more. The fascinating thing to me was that the rabbit was not just going back and forth to these holes but he was actually sprinting at full speed. Finally I realized he was practicing his escape routes. And at the same time he was fine tining his holes if he could not get through fast enough.

Traders, like rabbits, must be quick and nimble. Perhaps the metaphor extends beyond just speed. The rabbit can teach us that the smart trader must also have multiple entry holes and multiple exits to escape the many predators and deceptions in the market. When we decide on a trade perhaps the better one is one that allows entry over several periods and can be exited over several periods in the future.

In the same manner the rabbit can teach us the importance of practicing our escapes at speed. For the novice trader this can take the form of paper trading real time prior to the first trade. This might be good advice for a new system regardless of one's trading experience. No one ever lost money by paper trading. Even for experienced traders the idea of practice translates, at a minimum, into back testing our trades before we take them. The rabbit can teach us much.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

This is the "prey" side of the equation. The predator side of the equation is also worth looking at. It involves learning the habits and escape routes of its prey. My good friend Phil mentions how he wouldn't have noticed the escape routes had he not chanced upon the rabbit using them. Noticing things like this is the mark of a predator.

Even though Phil may not have noticed the escape routes if it weren't for the visual observation, predators in the wild rely on more than their eyes to spot the routes of their prey. Probably their most important sense is that of smell. We as humans can't really understand an animals sense of smell and just how acute it really is. But having spent thousands of hours in the woods, I've witnessed first hand just how incredible a wild animals sense of smell really is.

These escape routes that this rabbit is so meticulously putting together will very likely be his undoing. Coyotes and dogs often hunt in packs or small groups (I know my two dogs, Rex and Layla, hunt as a team and have ambushed many a squirrel, rabbit and chipmunk). These canines can smell the path that the rabbits have been using and know where they're likely to travel. All they have to do is set an ambush. One coyote chases the rabbit through hole A while the other coyote waits at hole B.

I've witnessed, in the wild, coyotes hunting as a pack, almost corralling a deer into an ambush. Once, I was up in a tree stand and saw some coyotes chasing a deer. I then heard a noise behind me and noticed that some coyotes were coming thru the woodlot in the opposite direction. The deer was running from the coyotes across a harvested corn field toward the apparent safety of my woodlot, not realizing that an ambush was waiting.

The coyotes thought they had the ultimate trap set up and were about to go "long" a deer. I was also long deer that day too. But the deer coming towards me was too small for my tastes, so I decided to let that deer live another day. I changed to a short position on the deer (I sold his life back to him and will buy it back in a few years), and went "long" coyotes.

I drew my bow back, took careful aim and "placed my trade" on the nearest coyote. The ultimate arbitrage…..the predator became the prey! This quickly displayed just how weak the coyotes position really was, as I was able to break apart their entire portfolio for the day with that one shot (er….ummmm……I mean trade). I profited well on that coyote trade. I'm still short that deer, but hopefully in a few years, I'll have the chance to "cover my short" on him!

I wonder how many examples of this there are of predators in the market……and how many examples of predators becoming prey there are? As Professor McDonnell points out people learn that they need to set escape points, to protect themselves. But in many cases, they only end up bringing about their own demise. For instance, so many people set stops at the round, rather than a few pennies above and then wonder why they get a fill so far below their stop, not even realizing that the masses were trying to use that same escape route. The smart predators sniffed it out in advance and capitalized on it.

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1 Comment so far

1. steve leslie on May 20, 2008 10:34 am

My best friend for 15 years was "Stoli" a beautiful blonde English cocker spaniel that adopted me when he was one year old. I say he adopted me because of the way that we found each other. Stoli was a purebred spaniel and the owner needed to find a proper home for him since she just gave birth to a newborn child and homeschooled an 8 year old and she felt that the burden was too great to raise three at the same time. I gladly allowed him to adopt me. After a period of getting to know each other, I began to take him to some woods a few miles away and let him run free to get adequate exercise that cannot be accomplished with walks around the block.

For those unfamiliar with cocker spaniels, they were popularized in the Disney classic Lady and the Tramp. However, they were originally bred as a field dog through the springer spaniel line. They are considered a gun dog as they are a prized possession of hunters. They are smaller than a springer weighing 25 lbs fully developed and standing 15 inches at the withers. Their name is derived from the fowl they were bred to hunt, the woodcock of England and their long and sturdy coat protected them from the brambles and hedges that they encountered in the field. They are built lower to the ground than a springer and with a powerful chest and compact legs which allows them to get through the thick underbrush. Their job is to flush out the game and allow the hunter to take a clean shot at the prey.

Immediately, he took to the forest as if he had been there his whole life. It was remarkable to watch him work a field. He would never walk or run in a straight line. He would move in 45 degree angles constantly darting back and forth and smelling as he went. His "nose" was intact after years of careful breeding. He had an amazing ability to triangulate an area constantly zig zagging and smelling as he went. Once he captured a scent of something, he was tenacious and stayed on it following it where it led him until he uncovered the prey.

There was an interesting test that I put him through one day. I let him get ahead of me by 25 or thirty yards while walking through a field with grass nearly as high as he was. When I thogh t he had gotten far enough enough away I jumped behind a tree to see what he would do. After a few seconds, he stopped perked his head up looked back and immediately retraced his steps, almost exactly, searching for me.

It did not take Stoli very long to find me either crouched behind a tree. He greeted me with a huge smile, practically jumping into my arms and licked my face profusely. His joy knew no bounds, and once he found me he resumed the hunt in order to finish his mission and please his master.

Stoli has since passed away overcome by age but the memories will linger forever in my heart. He truly was the best friend that I ever had. I think to this day that he taught me far more than I ever taught him.

sidebar If you want to read a great series on animals domestic and otherwise, I highly recommend the classics of James Herriot. All Creatures Great and Small, and the sequels. There is also a series that can be purchased on DVD produced by BBC which starred Christopher Timothy as Dr. Herriot DVM. Both are to be treasured by animal enthusiasts.

sl.