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Posted 10/18/2001
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The Speculator
5 endangered species of the investing kingdom
Time was already running against these relics, but the last 18 months has sealed the fates of the Chronic Bear, the Raging Trader, the Single-System Man, the Floor Trader and the Patient Mutual Fund Investor.
By Victor Niederhoffer and Laurel Kenner
It's customary around this season, as the leaves brighten and drift to the ground, to reminisce. There's sorrow for the dead. There's atonement -- and The Speculator has much to atone for. There's cleansing amid the tragedies and mistakes, sometimes in the general merriment of Halloween on Oct. 31, the Day of the Dead on Nov. 2 and Simchas Torah, which fell on Oct. 10 this year.
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As the new century unfolds, it's also an appropriate time to pay tribute to characters who may not survive in modern times. Many things are changing -- mostly for the good, we believe -- and a lot of market players will fade away. So, before they become extinct, we will memorialize them in the spirit of Sholom Aleichem, who wrote in the early 1900s of how the poor Jews of the Ukraine celebrated Simchas Torah.
- In bygone days, (ah, the bygone days!) they
themselves would not only get as drunk as Lot, they would also get the
mayor and the constables drunk, and all of them together would go
dancing coatless and hatless over the roofs of the rich householders.
But times have changed. Many of the revelers have died out and those who
are left will soon go too. And so I hasten to set down their names and
describe each one separately with all his quirks and oddities. Let there
be a memorial no matter how small, let there be a record of how Jews
used to celebrate and make merry in their exile.
Aleichem wrote of Aleck the tailor, who was losing business to Lazer Ready-to-Wear; Kopel the Brain, the gloomy shoemaker with the terrible wife, Sara the Speechmaker; and Mendel the Tinman, who glazed samovars and doctored cows on the side. We have our own list of vanishing types: the Chronic Bear, the Raging Trader, the Moving-Average Man, the Floor Trader and the Patient Mutual Fund Investor.
If you recognize yourself in any of them, perhaps it's time to change your game. Otherwise, you may find yourself replaced by others more nimble, more clear-sighted and more able to count.
The Chronic Bear
Since 1980, this rare species has been predicting Armageddon. He knew disaster was nigh because the market's price-to-earnings ratio was higher than it had been since the ‘20s. Rallies lasted longer than they ever had, and that had to be bad, and most stocks were below their 52-week highs, and that was even worse. For two decades, the market looked to him just like it did before the 1929 crash, and the decline of Oct. 19, 1987, tripled his bearishness. The market would, he felt sure, repeat in the 1990s the 90% drop it had from September 1929 to July 1932. There had been bear market rallies then, too. Forget that interest rates declined to 5% from 12% in the 1990s, and that the Berlin Wall had crumbled; the economy had never before grown for so many months in a row. While not investing himself, he advised all his acquaintances to put their money into a short-selling fund run by his oldest friends. The fund lost 50% a year, year after year, during the 1990s and closed shop in 1999. The Chronic Bear at last entered the market in late 1999, shorting the Nasdaq 100. After losing all his money, he watched with glee as the market in 2000 and 2001 finally did what he had predicted for the last 20 years, but he was not able to participate in it. Of course, when the upturns come, he won't be participating in them, either. Except for the last 18 months, the Chronic Bear has caused incalculable damage. Goodbye.
The Raging Trader
He used to make a heavy seven-figure income just by buying the techs in a sell-off. He'd buy $6 million or so of stocks, plus a couple of hundred Nasdaq futures. The market eventually finished selling off, and all the tech stocks would pop up from under water like balloons. The trader thought he was some kind of genius. And then the stocks started selling off after the sell-offs. So he went short with a vengeance, but got caught by the market's periodic rallies. Finally, when stocks started acting like leaves in the wind, he got to thinking that maybe "genius" was too strong. Out loud, he rages about the big market makers and decimalization. Tough business, day trading.
The Single-System Man
On his computer screen, he has moving averages for each of the 30 stocks that he follows. These overlapping statistics provide overwhelming proof that a stock has been going up or down. When the price of one of these stocks goes above or below his chosen moving average, a bell rings, and his computer automatically places an order with the discount broker that provides the screen. He made $50,000 on $100,000 in six months when he started trading this method in 1999, and paid $30,000 in taxes. The pot rose to $500,000 when his family joined him in early 2000. The signals worked; he made $100,000 in price appreciation. But he paid $600,000 in commissions, so he was down $500,000 net. The bright side is that he is now entitled to deduct $2,000 a year of his losses for the next 250 years. He recently lost his job and received two months' severance pay. He plans to use the money to start trading again, but this time with a deep discount broker. He may eventually figure out that his strategy is so obvious that cannier traders are lying in wait for him, but by then it will be too late.
The Floor Trader
The floor trader spends his days yelling and screaming, "Where is it?" He is lucky to get out of the pit without laryngitis or worse. After a few years, he knew where all the stops were, and where the big boys liked to come in, and he knew to blacklist anybody who didn't order at the round number. The floor trader has bone spurs in his feet, but the big man won't let him sit down. The floor trader insists floor trading will be around forever. But to himself, he admits that electronic trading is replacing him in one market after another. He secretly wants to go "upstairs," where everybody has a chair. For all his faults, we must deplore his likely fate. Through their rough-and-tumble competition, he and his colleagues did a much better job of providing liquidity than the monopoly of gentlemanly specialists on the stock exchanges.
The Patient Mutual Fund Investor
(This one is courtesy of John Lamberg, Minnetonka, Minn.) The patient mutual fund investor picked out a long-term investment for the kid's college fund in 1993. Put the quarterly statements in a file without a second glance. Never concerned about minor fluctuations. Long about 1998, he noticed that the five-year return was back at the stands drinking up the Gatorade while the S&P 500 had tripled. He held steady. Had faith in the managers. This year, he received a letter about new semiannual fees for small accounts. Well, the account certainly was smaller than he had hoped. Wrote a letter to the famous mutual fund company about how pleased the kid is with the 5% compounded annual return. Told them the kid is grateful his parents did not pick another investment firm with inferior investment expertise. Assured them that when the kid is ready to open a brokerage account, he'll carefully weigh the consideration and outstanding investment expertise provided by the big mutual fund company. Closed the letter with a cheerful: "Looking forward to those new semiannual fees." When this breed dies out, taking a score of mutual fund managers along with him in ecological consequence, others will learn that blind faith doesn't pay.
They'll none of ‘em be missed -- they'll none of ‘em be missed.
-- W.S. Gilbert and Sir Arthur Sullivan, The Mikado
End note
The portfolio of under-$5 stocks highly rated by Value Line that we bought on Sept. 27 and Sept. 28 has performed considerably better than we had hoped and many of our readers had anticipated. It now shows a profit of 7.3%. When the market is in the doldrums, it is hard to remember that sometimes improvements and future prospects, from no matter how humble a level, are often greeted with hope and anticipation by market participants. The expectation for similar portfolios has been 16% over six months. We intend to hold through Mar. 31.
We have recently been focusing our attention on a group of low-priced biotech stocks with recent insider buying. Eventually, the current interest in bioterrorism should diffuse to other, more positive applications of biotechnology. The biotech scientist is not among our vanishing types. Regrettably, we know little of biotech; in fact, we know little aside from counting, music, racket sports and how to learn. We will note, however, that our vetting of a list of recent IPOs came up with one, Durect (DRRX, news, msgs), with insider buying in the past two months. We do not know enough to recommend it, but we note that on Sept. 5, the company completed Phase II testing of an implant that delivers medication for chronic pain.
At the risk of becoming the first columnists in at least six months to sound a bit optimistic about an IPO, we suggest that investors may want to watch for the offering of DiaDexus. The San Francisco company, which uses genomic information to develop diagnostics and therapies, has a high-powered non-executive chairman: George Poste, the head of the Pentagon's task force on protecting the U.S. against bioterrorism. DiaDexus was started in 1997 by Incyte (INCY, news, msgs) and GlaxoSmithKline (GSK, news, msgs), where Poste was head of research from 1992 to 1997. No offering date has been set.
We plan to continue our study of biotech, and as always, we're happy to learn from our readers. We read all our mail. Send comments to dciocca@bloomberg.net.
Neither Victor Niederhoffer nor Laurel Kenner owns any of the stocks mentioned in this column. Any similarities to real persons are merely coincidental.
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.