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Posted 8/16/2001
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The Speculator
Buy on Thursday, profit on Friday
Because the game isn’t over until you’ve divined its lessons and put them to work, we’ve reflected on the past months of S&P performance and found a pattern that’ll end your week on a high note.
By Victor Niederhoffer and Laurel Kenner
No matter how brilliant your opening is, and no matter how brilliant your mid-game is, it is the endgame that determines the result of the match.
-- Tom Wiswell, checkers champion
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All great chess and checkers players know that the ending is the hardest and most important part of a game. It's where victory can be snatched from the jaws of defeat, or vice versa.
Our last three columns were devoted to trading principles taken from what champion players of various games do before and during matches. Today, we conclude our series by looking at what the experts do at endings and afterward. And we'll propose an Endgame Trade for making money on individual stocks at the ends of weeks.
We drew inspiration for this column from some of the more than 10,000 proverbs that a great master of chess and checkers, Tom Wiswell, wrote for Vic over 15 years of weekly lessons. We recently reread a few thousand of these aphorisms in honor of the Tom Wiswell Memorial Go As You Please U.S. Championship checkers tournament that ended in Las Vegas on Aug. 10.
The proverbs were written for chess, checkers, commerce, commodities and life. In all these endeavors, Wiswell observed, the opening, middle game and endgame are inextricably intertwined.
It's the finish that counts
Great players make their opening moves with a view to the endgame, regarding them as the beginning of the battle for control of the center. How does this relate to markets? As we suggested in our Aug. 2 column ("9 serve-and-volley trading tactics") traders and investors should maintain a stance that allows easy maneuvering into good opportunities. That means centralizing one's forces, pieces or chips -- avoiding overdiversification and having enough stamina (financial reserves) to proceed to victory.
Too much concentration on weak sidelines and too little flexibility are death. And as Wiswell said, "Losses are inevitable, but what hurts is when we needlessly inflict defeat upon ourselves (and the best of us do it)." Tom was particularly poignant on defeat, because he'd often write his proverbs in the middle of the fray in Vic's trading room, after surveying the carnage and sensing the tension and agony.
Equally important for the player is to reflect how you might change your next game, given what happened in the last game, the last day, the last trade. Have your risk preferences, your starting capital, your edge or your expected variability changed? If so, an adjustment is proper.
Most important of all, have you learned anything from your victories and your defeats? "Every master loses...and then comes back to win it all," Wiswell said. Those who pause after a loss to check the masters' games, figure out what went wrong, write it down and decide on a plan to prevent the mistake in the future are the ones who win the matches and tournaments. The losing player who says, "I'll look it up tomorrow" very seldom does.
Wiswell kept a record of all his games. As he put it: "If you don't write, you are wrong."
The advice on record-keeping applies just as well to other endeavors. Ken Miyata, a legendary fly fisherman, set a supreme example. Miyata, a Ph.D. in herpetology, died at 32 while casting for trout alone on the Big Horn River in Montana in 1983. The July/August 2000 Harvard alumni magazine memorialized his meticulous approach: "His computer files recorded not only fish caught, but also data on fly and hook, water conditions, weather and insect species hatching at a given date and time."
The Endgame Trade
In honor of Ken and Tom, the world's best at their respective pursuits, we've developed a method of trading for ends of weeks. The idea of our Endgame Trade is based on the tendency of markets to change the magic words that open the treasure cave.
We focused on Fridays, because the market has tended to reverse directions on Fridays for the past few months to an inordinate degree. For example, starting with March 30, S&P futures have alternated between up and down on Fridays for 20 weeks, with only one exception. The correlation of the actual moves was -0.30 in S&P futures and -0.42 in Nasdaq 100 futures.
To commemorate the very specific nature of the study that Miyata and Wiswell engaged in -- for example, Miyata might pump a trout's stomach to learn what insects it had been eating, while in Wiswell's case, a loss instantly triggered 24 hours of continuous telephonic analysis with 10 experts across the world -- we will not be content with just applying this method to the averages themselves, profitable though that has been over the past five months.
For example, by buying one S&P futures contract at the close on the Thursday after a down Friday, the average gain over the past four months has been 11 points. The total profit for the 10 trades that occurred in that time period was $27,500. On a full futures margin of $21,600, this works out to about 12.7% a trade.
Say, on June 14, we bought one S&P 500 futures contract, trading then at 1214. Contracts are valued at $250 a point, so ours was worth $303,500. We put down the required minimum margin of $21,600 and sold the next day at 1226, a contract value of $306,500, for a profit of $3,000, or 13.9%.
Similarly, selling one futures contract short at the close on Thursday after the previous Friday was up resulted in an average move of -12.1 points, for a total profit of $27,225. On full margin of $21,600, that was an average of 14% a trade.
Rather than stop there, we tested a strategy for buying individual stocks, employing the reversal tendency.
As we have emphasized in our previous articles on sports and markets, each reader should tailor his trading to how hard he likes to play. We are opposed to selling individual stocks short, as we believe that the practice ultimately leads to ruin. Whenever we say that, we receive much mail from those who disagree with us. By no means is our rule carved in stone. But because we avoid short sales, the method we propose is to buy, at Thursday's close, the four Dow stocks that fell the most on a previous down Friday.
We chose four in honor of the checkerboard's rows, where four black squares alternate with four red squares.
The rules for Endgame Trades
- Wait until the S&P 500 ($INX) falls on a Friday. Note the four Dow stocks that fell the most that day.
- On the following Thursday, buy those four stocks at the close.
- Hold all four stocks for one day, and sell them at Friday's close.
A 95% confidence interval of the mean is calculated to be between 0.42% and 1.76%, enabling us to state with 95% confidence that the true expected return for our four-stock portfolio lies within this range.
Endgame trades
| Date | Stock | % 1-day move | Date | Stock | % 1-day move |
| 8/10/01 | Amer.Express (AXP, news, msgs) | 0.1 | 6/1/01 | Boeing (BA, news, msgs) | 3.4 |
| Procter & Gamble (PG, news, msgs) | 1.7 | Amer.Express (AXP, news, msgs) | 0.6 | ||
| SBC Comm . (SBC, news, msgs) | 3.2 | GE (GE, news, msgs) | 0.0 | ||
| Philip Morris (MO, news, msgs) | -0.9 | Honeywell (HON, news, msgs) | -0.1 | ||
| AVG | 1.03 | AVG | 0.98 | ||
| 7/27/01 | SBC Comm . (SBC, news, msgs) | 0.3 | 5/18/01 | Intel (INTC, news, msgs) | 0.6 |
| 3M (MMM, news, msgs) | 0.0 | IBM (IBM, news, msgs) | 2.1 | ||
| Merck (MRK, news, msgs) | 0.6 | Int'l Paper (IP, news, msgs) | -1.3 | ||
| Coca-Cola (KO, news, msgs) | -0.5 | J.P.Morgan (JPM, news, msgs) | -0.1 | ||
| AVG | 0.10 | AVG | 0.33 | ||
| 7/13/01 | Intel (INTC, news, msgs) | 0.3 | 4/27/01 | 3M (MMM, news, msgs) | 1.0 |
| Hewlett-Packard (HWP, news, msgs) | 3.6 | Amer.Express (AXP, news, msgs) | 4.4 | ||
| Caterpillar (CAT, news, msgs) | 1.1 | SBC Comm . (SBC, news, msgs) | 2.4 | ||
| Honeywell (HON, news, msgs) | 1.1 | Kodak (EK, news, msgs) | -1.7 | ||
| AVG | 1.53 | AVG | 1.53 | ||
| 6/29/01 | General Motors (GM, news, msgs) | 0.9 | 4/12/2001 * | Hewlett-Packard (HWP, news, msgs) | 1.2 |
| Disney (DIS, news, msgs) | 1.9 | Citibank (C, news, msgs) | 2.1 | ||
| J.P.Morgan (JPM, news, msgs) | -1.2 | J.P.Morgan (JPM, news, msgs) | 1.4 | ||
| Caterpillar (CAT, news, msgs) | -1.2 | AT & T (T, news, msgs) | 0.3 | ||
| AVG | 0.10 | AVG | 1.25 | ||
| 6/15/01 | J.P.Morgan (JPM, news, msgs) | 3.0 | 3/23/01 | IBM (IBM, news, msgs) | 4.9 |
| Hewlett-Packard (HWP, news, msgs) | 0.7 | United Tech . (UTX, news, msgs) | -0.5 | ||
| United Tech . (UTX, news, msgs) | -3.0 | Boeing (BA, news, msgs) | 1.9 | ||
| Boeing (BA, news, msgs) | 1.1 | Amer.Express (AXP, news, msgs) | 6.1 | ||
| AVG | 0.45 | AVG | 3.1 |
By contrast, S&P futures rose an average of 0.04% during the period of the study.
We won't be employing the Endgame Trade this week, because S&P futures rose last Friday. As Wiswell said, "You have to know the rhythm and the melody. If you do, you can make beautiful music on the board." And, we venture to say, in the market.
End notes
We will send our 30 favorite Wiswell proverbs on endgames and aftermaths to any reader who requests them.
At the time of publication, neither Vic Niederhoffer nor Laurel Kenner owned any stocks mentioned in this column.
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.