The Touchdown, from Victor Niederhoffer

February 3, 2009 |

The touchdown interception in the last second of the first half, changing the score from a likely 10-14 to 17-7, immediately brought to mind whether sports imitates the market. And of course the mistress had already thought of this going from -1/2% at 350 to +1/2 % at the 415 close on two occasions in the last 10 years, and the reverse on four occasions. In each case, the mistress gave the final outcome the next day, to the side that had the 3 50 advantage. perhaps to make it more realistic I should have reported 1150 to 1200 reversals.

Jim Sogi comments:

Don't forget the bad calls being reversed and changing the outcome. And the multiple fakes out of the hike. It just needs to fake one defender out to work. The full field reversals, like the 100 yard interception, feel like recent markets. Even at the last minutes of the game or quarter.

James Lackey adds:

As the regulators throw too many flags.

Gordon Haave responds:

I was thinking about the game in terms of stupid behavior that people engage in, over and over again. In football it is the "prevent defense. Teams play great D all game, then in the last five minutes shift to "prevent" defense, where they take out linebackers in favor of more backfield players. All it ever does in prevent the team from winning. This is why the endings of games are so high-scoring.

In the markets, people do all sorts of things to prevent them from losing lots of money, which only insure that they lose the game. Such examples include most of the technical rules, and the dollar-cost-averaging.

Scott Brooks replies:

What Prof. Haave is saying about dollar cost averaging is true if someone has a lump sum to invest. In that case, unless he thinks he can time the market, he should go all in. American Funds had a nice piece on this a few years ago showing two people who invested a lump sum each year. One did at the market high, the other did it the market low every year for a long time. Of course the person who invested at the market low each year got the best return, but the one invested at the market high still got an exceptional return.

However, DCA is not a marketing ploy for the masses, it is a salvation for them. It encourages them to invest on a monthly basis and be in the market each month no matter what the market is doing. It allows them to invest without worrying about the highs and lows of the market. It gives them peace of mind to invest when times are bad. It, quite literally, gets them excited about investing when the market is not so good.

DCAing is very important to Johnny and Sally Lunchbucket… even if they don't know it!

Also, Kurt Warner has been to three Superbowls. He's lost two and barely won one (see "The Tackle")

In both cases where he lost, it was the defense that let him down. I can't say for sure, but I believe it was the "Prevent Defense" that was at fault. In the case of "The Tackle", a porous defense came within 1 foot of losing the game as the clock ran out.

In each of his three Super Bowls, he played against one of the most highly rated defenses in NFL of that year. He and the offense did their job and scored enough points to win.

Kurt Warner should have three Super Bowl Rings in his collection instead of just one. Unfortunately, his defenses let him down.

Phil McDonnell adds:

The reason Dollar Cost averaging works is because it benefits from volatility. Individual stocks are more volatile than the averages so we would expect it to work better on the 30 individual Dow stocks than just on the Dow average itself. The fatal flaw in any strategy is that one needs to invest in stocks that do not go down. For DCA sideways is OK, it will actually make a little money. But if you put all your eggs in the Enron basket you are still broke, DCA will not save you.

About half of the returns of all the stock markets over the last 100 years are due to DCA. Reinvestment of dividends is a form of DCA. The average return in prices has been about 6%/annum. The dividend yield has been about 3% overall. So one would think that the returns if dividends are reinvested will be about 50% higher. In fact dividend reinvestment outperforms by 100% because of the subtle contribution of DCA.

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

Comments

16 Comments so far

douglas roberts dimick on February 2, 2009 8:37 am
Talk about Bad Calls?…

I just read this headline:

U.S. Bank Group Wants Fed to Oversee Risk in System
01/30/2009 3:50:04 PM ET
WASHINGTON (Reuters)—A group representing large financial institutions urged the U.S. Congress on Friday [Jan. 30] to give the Federal Reserve new powers to ensure stability of the country’s financial system.

Does the Fed have enough power already?

This system so implied appears almost like the lawyers with the ABA self-regulatory paradigm. Is that disciplinary process effective — perhaps, for the lawyers?

Again, rules-based systems balance ethical and market efficiency metrics based on the “pitcher’s corner eye.” dr
david higgs on February 2, 2009 8:52 am
And it was a lineman who ran it back 101 yard for TD, that's like subprime saving the day, when he/it should of been thrown out of the game for poor sportsmanship…
Steve Leslie on February 2, 2009 12:07 pm
One illustration I am thinking of is you are driving toward the goal line ready to score at worst a field goal and at best a touchdown. (You are waiting on an earnings report from a company)

The quarterback throws an interception. (Numbers come out worst than expected and the stock drops 35%)

Now you have to rebuild your capital and are back in the hole.

Instead of earning, you can substitute a bad report for a biotech company and stock gets hit bad.

In poker you are sitting in a great position with a large pair Q-Q or better. You decide to raise pre-flop and get one caller. Flop comes out 8-5-3 rainbow. Person checks in front of you, you bet out and get a check raise. You are now wondering what is going on. Maybe you let your hand go but you decide to call. You come to find out that the person who check-raised you rolled up a set. (They just returned your interception for a touchdown)
Blake on February 2, 2009 3:37 pm
Kurt Warner’s short-term decision impacted that moment with a minimum 7pt (and probably 10-14pt) swing. It is just like Congress voting down TARP the first time, rather than a good short-term result, it killed them.
snguyen on February 3, 2009 12:03 pm
While I agree that the “prevent defense” does not seem to do such a great job of actually preventing scores. In this case maybe the defense let him down, or perhaps Warner let his team down by throwing interceptions that were returned for touchdowns in both superbowl losses.

I suppose this illustrates that data can be interpreted in different ways, or Kurt warner is an illustration of high risk/reward, or nothing at all
George Parkanyi on February 3, 2009 1:08 pm
Throwing a game-losing 100-yard touchdown interception in the Superbowl with a hundred million people watching and no time left on the clock - that’s about as close as it gets to the ultimate definition of a “bad day”.
Hudson Cashdan on February 4, 2009 10:41 am
Kurt Warner in once again the most over-rated QB of all-time. Given 4-5 seconds, any QB can sit back and throw darts to open WR’s. This is the offense- strong O-line and many weapons- that Warner was fortunate to have in St.Louis and now in AZ. I give him credit for executing but anyone who watches him regularly knows that if there is any pressure the guy is immobile and generally awful. Big Ben is far superior to Warner. Big Ben is the new Elway.
Steve Leslie on February 4, 2009 4:54 pm
To Casdan; What a worthless post. It adds nothing to the conversation nor the post. You provide no meal for day less a lifetime and forget ballyhoo deflation. Once again a self consumed egocentric person who wants to take delight in a mishap of another. Being a contributor to this website for years, it is sometimes exhausting to being exposed to worthless words. If you want to comment on Warner do it on talk radio for G-d’s sake.
Hudson Cashdan on February 4, 2009 6:19 pm
Apologies sles — I forgot to use Kurt Warner’s performance as part of a verbose market analogy. How about this: Kurt Warner is like the stock of an over-levered cyclical company- when the economy is booming the earnings come through and the multiple expands. But when the economy recedes the shareholders flee due to bankrupcy concerns.

I was responding to Brooks: “Kurt Warner should have 3 Super Bowl Rings in his collection instead of just one. Unfortunately, his defenses let him down.” Just trying to offer that perhaps it’s his offense that picks him up.
John Montreau on February 4, 2009 7:30 pm
Steve and his rants…what’s new?
vniederhoffer on February 4, 2009 11:49 pm
I found Mr. Cashdan's contribution and the others very helpful. Artie played football at Brooklyn College as I recapped in EdSpec especially with the All-American letter to Coach Lou but I have just a layman's knowledge of football and baseball and basketball. The insights that Mr. Cashdan and others of his ilk provide is most enlightening and ennobling. vic
Steve Leslie on February 5, 2009 1:48 am
I am guilty as charged. I do rant. And I do extend my writing to stream of consciousness too much. As far as my great friend Scott Brooks who happens to be from the St. Louis area points out Kurt Warner should have three rings. Well Greg Norman should probably have 7 major victories but yet has but 2 and none on this U.S. soil. Garcia does not have one. Coulda woulda shoulda's and wishing such exist in the fantasy world not the real world. Parcells once again says your record is what it is. End of discussion. Marino went to the Superbowl once and has zero rings. Warren Moon zero. Kelly, zero Tarkinton zero,

Cashdan has synopsized his correlation of Warner to the markets and that is good. As for any QB with 4-5 seconds can is hyperbole. If any can then why don't they?

Ryan Leaf was the most overhyped QB ever. Most overrated QB is totally argumentative unquantifiable and untestable. That was my point. Since I hate the Cowboys I will throw Romo in the mix as most overrated followed by Vick. He has yet to even win a playoff game and Vick is in prison. And Remember They were the favorites to win the Super Bowl, Followed by such teams as Giants, Colts, Steelers, Patriots, Panthers,Titans Rams did not even win 10 regular season games.

PLUS I am from Cleveland and hate the Steelers by tradition. And my car would not start today and it is 37 in Florida today. So take that everybody BRING IT ON. I will show you who is willing to pee in your cheerios.
Hudson Cashdan on February 5, 2009 12:16 pm
Dr. Niederhoffer, thank you but I think you exaggerate my contribution here — at least in this case. My comment was generally unrelated to the subject matter but I couldn't resist panning Mr. Warner's assumed prowess. But I am the first to admit that I am not football expert as I was more of a baseball player. Just don't get me started on Jim Rice and his lack of HOF credentials…

Thx for the enlightening posts and please keep them coming. I believe I was referred to The Origin of Wealth from this site — a truly worthy read.
Nick Sont on February 5, 2009 2:38 pm
As a Fantasy Football lover and market addict I have to disagree with the post that Warner is an over-rated QB. This can be simply verified with stats on the table for everyone to see.

Warner was sacked 26 times during the season for a total of 182 yds. loss. This is about average for all the QBs with the high end at 47 sacks on Matt Cassel and 11 on Jay Cutler. So the Cardinals offensive line was not dominant as claimed by Mr. Hudson.

The key number to watch was Warner’s pass completion per attempt at 67.1%. The second highest on the league and only behind Chad Pennington. Mr. Warner also put impressive numbers as far as TDs scored ranking third in the league. Thus he is an accurate pass QB that can consistently score under pressure and when it counts the most.

Folks, so now you can see that there is ABSOLUTELY no coincidence that the Cardinals decided to throw a short pass to Boldin during the Super Bowl (which unfortunately was intercepted) instead of pounding the ball through the middle. They were just following their system! Do you see a similarity with mechanical systems? You take the signal as it comes and there is no reason or time to second guess it.

I could go on an on over this. But there is a meal for a lifetime here. Fantasy football aficionados and defensive/offensive coordinators are truly number crunchers. The large majority play with probabilities and not gut feelings. If you love the financial market then you can learn a thing or two from this crowd.
Steve Leslie on February 5, 2009 5:14 pm
Great points Mr. Sont. I agree a good meal indeed. I am compelled to add this point. Warner, like Tony Dungy, Tim Tebow and others are men of character. Lest we forget, Pat Tillman, Arizona Cardinal safety, who chose to serve in the military and was killed in battle.
douglas roberts dimick on February 6, 2009 10:18 am
Speculation, right? That is what Mr. Cashdan was doing. That is what this site is about…

Citation: The Crew: as Bobby (Richard Dreyfuss) concludes in support of Burger King… “Enough said.”
www.rottentomatoes.com/m/1099659-crew/

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