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Posted 12/6/2001
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The Speculator
It's not a profit until you take it
The market has been rising; maybe your stocks are up. But remember these 7 investing lessons from the checkerboard, and don't be afraid make your moves.
By Victor Niederhoffer and Laurel Kenner
For the first time in what seems like ages, the markets have gone up two months in a row. S&P 500 futures ended November at 1,140, up from a post-terrorist-attack low of 939 on Sept. 21, while the Dow Jones Industrials Average ($INDU) went from 8,235 on Sept. 21 to almost 10,000 on Nov. 26.
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In both the S&P 500 ($INX) and the Nasdaq 100 ($NDX.X), we found 46 companies that rose 50% or more from Sept. 21 through Nov. 30. The stars were BroadVision (BVSN, news, msgs) -- remember e-business? -- up 324%, and chipmaker Qlogic (QLGC, news, msgs), up 143%.
Investors again have a two-month lead in the game, which hasn't happened since the end of May, when the Dow was at 10,911. But as Tom Wiswell, the checkers player who taught Vic for 20 years, liked to say, "You have to win it."
Tom, who reigned undefeated as world champion from 1953 to 1978, called this "the mopping-up process." In this column, we'll pass along his advice on mopping up, along with hints from masters in chess and fencing, as well from Vic, who learned a thing or two on the subject during a 10-year reign as unbeaten national squash champion.
As we've often said, we are averse to issuing rules that can't be tested for uncertainty and applicability. In Wiswell's case, however, we will say that the record speaks for itself. We'll start with seven of his rules for mopping up a win, with our own thoughts on how they extend to investing.
Hesitation Is fatal
It is better to make a wrong decision than to build up a habit of indecision. – Wiswell
Market application: When you have a good profit and tax considerations aren't key, don't dither. Take the profit, it's yours. The market knows when you wait for that last little extra bit.
Play to center
Pieces on the side of the board are the handwriting on the wall. – Wiswell
Market application: Leave yourself with alternate escape and attack routes, so that you have flexibility in your sells and holds.
Simple endings
To win by an unsound combination, however showy, fills me with horror. – Wiswell
Market application: Don't wait for a fantastic move in your favor to get out.
Preventive medicine
It's a lot easier to stay out of a trap than it is to draw. So beware. – Wiswell
Market application: Don't take your eyes off the market for a minute. The enemy can strike unexpectedly at any time.
Less is more
Position often beats possession. You often lose when you have a majority. – Wiswell
Market application: By taking a gain and giving yourself liquidity, you maintain your flexibility to grab the big ones.
Playing a champion
If you strike at a king, you must kill him. Half-measures don't work. – Wiswell
Market application: Trades that give you a reasonable chance of losing a big share of your chips must be balanced with an expectation of big profits.
Speed fails
The faster you move, the sooner you'll lose. The steadiest player wins the laurel wreath. -- Wiswell
Market application: Don't be frivolous or impulsive with investments.
The atomic level
We were much chastised for being nowhere close to mopping up on last week's exploration of possible applications of physics to investing. Our editor likened our Atomic Theory of Markets to "an earnest translation of a Hungarian economics text." Some sample reader diatribes: "I am on a Physics listserv, and we have discussed the problems of misused analogies for a long time. I hope you don't invest on the basis of your hypothesis."…"I found your analysis totally absurd." …"Your theory and tests would make any grad student hang their heads in shame, except some Harvard MBAs. Markets, especially the stock market of the past 20 years, have been totally driven by human expectations, not by any laws of nature except that of humans having unlimited amounts of fear and greed."
Counterbalancing these criticisms, many physicists and other learned readers suggested augmentations that we found highly suggestive of interesting scientific trades. Physics aficionado Ron Ragusa, noting that the solar-system model of the atom was debunked a century ago, suggested we look for market analogies in quantum mechanics instead. "Its probabilistic nature, reliance on statistical analysis and the fact that quantum calculations are carried out over large numbers of events make it far more market-like than classical mechanics," Ragusa wrote. "The realm of quantum mechanics can be quite weird and pretty much impossible to describe using classical definitions. But hey, is the market really so different?"
Another reader, an engineer and amateur investor, wrote that the immutable laws that work for building bridges may not be as plentiful in the areas of economics, investing and management. "If there are any such laws, they are apt to be similar to those which determine which mutating species on the jungle floor might ultimately prove successful in finding a niche," he wrote.
And reader John Agostini had three questions for us:
- Do large groups of humans act in predictable ways when specific forces act on them?
As our readers so readily discerned, we're not physics experts. But we do know something about mopping up, at least in racket sports. Whenever Vic was ahead in a game, he liked to imagine that the score was against him by his margin of victory. Near the end of a match, he redoubled his energy and never hit slow shots. The opponent is always at a do-or-die stage at that point, and will run his hardest to catch anything without pace. As Art Bisquier, a chess grandmaster who has won every conceivable U.S. championship, likes to say: "Do to them before they do to you."
Jamie Melcher, however, a former Olympic fencer who now runs Balestra Capital in Manhattan, said he became more cautious about mopping up after losing a number of early matches. As he matured, he said, "I would fence defensively, determined not to lose a single point, rather than trying to win points. This shift in attitude enabled me to win those bouts almost every time."
The idea reconciling these apparently conflicting pieces of advice might be to avoid undue risks when you're ahead. This thought is consistent with the idea of taking gains after a good run in the market, such as we've seen recently. An extraordinarily wise old rule says, "Never underestimate your opponent." The market might be considered the toughest opponent of all. It certainly has been for us.
Taking our own advice, we are mopping up the profits on the biotech portfolio of asymmetric insider buying that we recommended Oct. 25. The average change in those stocks is 21.6%. Individual results follow:
Oct. 25 Biotech Portfolio
Performance Through End of November
| Stock | Cost (10/24 Close) | 11/30 Price | % Chg |
| Corvas (CVAS, news, msgs) | 5.82 | 6.62 | 13.7% |
| Dyax (DYAX, news, msgs) | 7.28 | 11.78 | 61.8% |
| Genelabs Technologies (GNLB, news, msgs) | 2.07 | 1.75 | -15.5% |
| Genzyme Transgenics (GZTC, news, msgs) | 4.1 | 4.95 | 20.7% |
| Guilford Pharmaceuticals (GLFD, news, msgs) | 11.41 | 13.05 | 14.4% |
| InKine Pharmaceutical (INKP, news, msgs) | 1.2 | 1.44 | 20.0% |
| Large Scale Biology (LSBC, news, msgs) | 3.7 | 4.05 | 9.5% |
| Medicines Co. (MDCO, news, msgs) | 6.39 | 10.88 | 70.3% |
| 3-Dimensional Pharmaceuticals (DDDP, news, msgs) | 7.23 | 8.88 | 22.8% |
| Triangle Pharmaceuticals (VIRS, news, msgs) | 4.03 | 3.95 | -2.0% |
| Average % Change | 21.6% |
Time to mop it up
In last week's column, we advised readers to start selling these stocks. We recall all too vividly the 1993 massacre caused by Hillary Clinton's attempt to nationalize health care and the rout after the March Y2K joint "genomics for the people" speech by Hillary's husband Bill and British Prime Minister Tony Blair, and we are wary of what politicians might make of the current flap over new aspects of biotech research. We are 75% out of our own holdings of these stocks, and we plan to sell the remaining quarter shortly. Anyone who based decisions on our recommendations should know what our thinking is.
Mopping up by taking profits may have drawbacks. Most of us find it very difficult to make two timing decisions -- sell and buy -- that both have above-average expectations. Capital-gains taxes reduce one's stake. And if academics are right about a 10% annual upward drift with random movements from all previous paths of price change, you won't get that return when you're out of the market. Even an old dog sometimes learns new tricks, though, and if we've learned anything over the past several years, it is that opportunities resulting from substantial event-driven declines are occurring with increasing frequency.
All things considered, including the grave concerns that our readers and editors have raised about our wisdom, we are not dissatisfied with a 21% monthly mop-up. The below-$5, high Value Line-ranked stocks that we recommended in our column of Sept. 27 showed a comparable 20% gain when we sold them in accordance with the advice in our Nov. 1 column. And we're pleased to recall that we mopped up before the summer crash on various portfolios of volatile stocks we recommended at the start of the year.
We may need a cushion as we wait for the market to give us another chance for an edge. Therefore, we are delighted to accept a 21% monthly profit, regardless of the wisdom of the academics.
End note
We're continuing to refine our Atomic Theory of Markets, and would like to hear from readers. Send augmentations, critiques and encomia to dciocca@bloomberg.net. We'll send more proverbs from Tom Wiswell to all who request them, along with a list of books we're finding useful in exploring the relations of physics and markets.
At the time of publication, Victor Niederhoffer and Laurel Kenner owned the following equities mentioned in this column: Corvas, Dyax, Genelabs Technologies, Genzyme Transgenics, Guilford Pharmaceuticals, InKine Pharmaceutical, Large Scale Biology, Medicines Co., 3-Dimensional Pharmaceuticals and Triangle Pharmaceuticals.
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.