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The Speculator
Bears in disguise, and other literary
lessons
As
we and our readers continue to look for investing tips from
literature, a passage from Patrick O'Brian reminds us that bear
markets can look like bulls until they bite.
By Victor
Niederhoffer and Laurel Kenner
We received the following query on Aug. 22 from a
Mr. Sri Viswanath:
Sir,
We
are 20% from the intraday low in the Dow industrials and 17% from
the closing low. Is that a bull market by technical
definition?
Until recently, we would have hesitated to
make pronouncements on technical issues of this magnitude. As a
distinguished reader pointed out in a withering letter after one of
our forays into the subject, neither Vic nor Laurel had ever spoken
from the podium of the Market Technicians Association. However, that
is about to change, as we explain at the end of today’s column. (And
none too soon, for Vic has recently developed a new interest:
fundamental analysis. We will be introducing some brand-new
fundamental ratios in this column in September.)
We will
therefore take the bear by the paws and answer Mr. Viswanath's
question with a pertinent passage from "Post Captain," the second
book in Patrick O'Brian's Jack Aubrey-Stephen Maturin series that
has been serving as our Speculator's compass this summer. In this
scene, which is abridged, Napoleon Bonaparte has just ordered the
arrest of every British subject, and Aubrey and Maturin are using
their wiliest deceptions to escape.
In the narrow band of shade under the northern wall of
the Carcassone a compassionate gendarme halted his convoy of
English prisoners -- seamen from detailed and captured ships for
the most part. When they had cooled a little, eaten and drunk,
they began to look about them. An English sea-officer, wishing to
impress the lady with whom he was traveling, spoke to the sergeant
of the gendarmerie, and the sergeant whistled to the master of the
bear.
"Papers," he said. "A Spanish passport, eh?
Profession, bear-leader. Eh, bien: a led bear knows how to dance
-- that is logic. But I have to have proof; it is my duty to see
the bear perform."
Dragged by its chain and beaten by its
leader till the dust flew from its shaggy side, the bear shuffled
forward. The bear-leader played a hornpipe, and the bear staggered
through a few of the steps before sitting down again. The sergeant
began to bawl, "En route, en route, les prisonniers."
The
convoy’s dust settled on the empty road. Silence.
"When one
sea-officer is to be roasted, there is always another at hand to
turn the spit," said the bear. "It is an old service proverb. I
hope to God I have that fornicating young sod under my command one
day. I’ll make him dance a hornpipe -- oh, such a hornpipe.
Stephen, prop my jaws open a little more, will you? I think I
shall die in five minutes if you don’t."
The moral of the
story, of course: Never be too sure of a bear. They are masters of
disguise.
Winners open their books to
us, win canes
We received many excellent contributions in
response to our call last week for literary characters with lessons
for speculators:
Alexandre Dumas’ D’Artagnan: From
reader Kevin Clark of Franklin, Tenn.: I have two literary
characters to propose. First, D'Artagnan. Not the young D'Artagnan
of The Three Musketeers, but the mature D'Artagnan of "The Vicomte
de Bragelonne." He creates an investment partnership with his old
servant Planchet, now a grocer. His object is to make a huge
speculative profit by restoring Charles II to the throne of England.
His initial plan is to raise a force of 40 men, but after a long
debate with himself reduces the number to 30, then 20 and finally
10. "I reduce myself, then, to 10 men; in this fashion I shall act
simply and with unity; I shall be forced to be prudent, which is
half success in an affair of the kind I am undertaking; a greater
number might, perhaps, have drawn me into some folly. . . . Ten men
who shall be as resolute as 40 who would cost me four times as much,
and to whom, for greater security, I will never open my mouth as to
our designs. . . ."
A second nomination is for Planchet, who
is no mean trader on his own account. Here's a sample of his
technique as he explains it to D'Artagnan. "I refused, pretending
that I could not sell them for more than 900 livres. He accused me
of usury. I begged him to repeat that word to me behind the
boulevards. He was an old guard, and he came; and I passed your
sword through his left thigh." "Tudieu! what a pretty sort of banker
you make!" said D'Artagnan. "For above 13% I fight," replied
Planchet. "That is my character." "Take only 12," said D'Artagnan,
"and call the rest premium and brokerage."
Louis L’Amour’s
Tell Sackett: From reader Brian Wheeler of Norristown, Pa.: My
first pick for a Louis L'Amour character would have been Tell
Sackett. His patience, foresight, research and hard work all paid
off in the long term.
(Note from Laurel and Vic: We are both
great fans of L’Amour’s Sackett series. Here’s our favorite quote
from "The Lonely Men," one of the Tell Sackett tales: "When you see
Apaches you’re worried, but when you don’t see them you’re maybe
really in trouble. They could be all around
you.")
Shakespeare’s Merchant of Venice: From reader
Chon Hsing Ng of Singapore: I would like to contribute the following
passage from Shakespeare's “Merchant of Venice,” Act 1, Scene 1,
where the merchant Antonio said:
My ventures are not in one bottom trusted,
Nor to one
place; nor is my whole estate
Upon the fortune of this present
year;
Therefore, my merchandise makes me not sad. As one
can see, long before Harry Markowitz and modern portfolio theory
came along, Shakespeare had understood the concept of
diversification.
More on Sir Arthur Conan Doyle’s Sherlock
Holmes: From reader Art Cooper: The Holmes character is at least
partly based on Doyle's medical professor, Dr. Joseph Bell of the
Edinburgh Infirmary. Bell used his extraordinary eye for detail to
make uncannily accurate diagnoses of the patients who came to him.
Holmes' penchant for observation of minute detail was thus
based on real-world successful application. Although devoted to the
keenest observation of detail, Holmes made it a point to gather all
pertinent facts before generating a hypothesis. He kept careful
records of background information: "For many years he had adopted a
system of docketing all paragraphs concerning men and things, so
that it was difficult to name a subject or a person on which he
could not at once furnish information, " Doyle wrote in "A Scandal
in Bohemia".
Indeed, Holmes went further and conducted his
own empirical research; he could, for example, identify a person’s
profession by the shape of his hand. "I have made a special study of
cigar ashes -- in fact, I have written a monograph upon the subject.
I flatter myself that I can distinguish at a glance the ash of any
known brand," Doyle wrote in "A Study in Scarlet."
Cooper
also reminds us that our column on literary lessons omitted a
quintessential speculative passage from "Silver
Blaze."
"Is there any point to which you wish to draw my
attention?"
"To the curious incident of the dog in the
night-time."
"The dog did nothing in the night-time."
"That
was the curious incident," remarked Sherlock Holmes.
Next
week, we’ll look at one application of the above passage and put
some numbers to it. As Holmes would say: "Data! Data!
Data!"
Stock buybacks
update
On April 18, we reported that, year to date, only
13 of the companies in the S&P 500 Index ($INX)
had announced plans to buy back their own stock. We took another
look last week and found the list had grown to 66 companies. As of
Aug. 19, these companies had risen an average of 3%, compared with
-4% for the S&P 500. We will send our buybacks list to all
readers who write to request@dailyspeculations.com.
Final note
Vic will be the
featured speaker at the September meeting of the New York chapter of
the Market Technicians Association: 4:30 p.m. Monday, Sept. 9,
Baruch College, 151 E. 25th St., Room 750, New York.
At the time of publication, neither Victor Niederhoffer
nor Laurel Kenner owned shares of any equities mentioned in this
column. They trade in derivatives instruments. They may be net long
or net short depending on the market conditions of the moment.
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