Practical Speculation

By Victor Niederhoffer and Laurel Kenner

(John Wiley & Sons, February 2003)


Table of Contents  

Author Information  


"This is a wonderful book. Victor Niederhoffer and Laurel Kenner probably know more about short-term movements than anyone else. Their knowledge, based on sophisticated analysis of their unique database, underlies the findings in this book–an invaluable guide for speculators."
–James H. Lorie, Eli B. and Harriet B. Williams Professor Emeritus of Business Administration Graduate School of Business, University of Chicago

"A Rabelaisian romp down Wall Street. Always taking the unconventional course, this book is fearless and occasionally shocking, but always the conclusions are backed up by supporting numbers. It leaves no sacred cow unskewered. Bold analogies and clever insights spill from its pages. Recommended to those seeking both fun and profit."
–Richard Zeckhauser, Frank P. Ramsey Professor of Political Economy, Harvard University

"A fascinating read, one that will both entertain and educate."
–Edwin S. Marks, Chairman, Carl Marks & Co., Inc.

"Practical Speculation is so good that I’ll guarantee it. If it’s not for you just return it to me with your sales receipt for a full prompt refund."
–Martin Edelston, Publisher, Bottom Line Personal


Real Money

Reviewer: Gary B. Smith, Jan. 13, 2004

We’ve all been there: You have a line of thought that’s so far apart from conventional wisdom that, over time, you start questioning your sanity – until that one magical moment when you’re talking to someone and, lo and behold, they’ve always thought the same exact thing as you. At that moment, you look them in the eye and simply say “thank you.”

I had that feeling many times as I was reading Victor Niederhoffer’s most recent book, Practical Speculation. (The book is co-written by Laurel Kenner, who probably doesn’t get enough credit.) Yes, that Victor Niederhoffer. The fellow who blew up just after his first book, The Education of a Speculator, came out. The fellow who has had more first dates with financial publications (including a stint at than you can count. The same fellow who finally knocked Sharif Khan down from the ivory tower of squash. (Squash fans can appreciate Niederhoffer’s racquet expertise.)

Now, longtime readers will know that if I advocate anything, it’s having a reliable methodology that has been tested and shown to be profitable in a variety of different market conditions. My sword of choice is technical analysis, but it doesn’t matter what you use. Just make sure your method is backed by loads of data.

And that is Niederhoffer’s main thrust. Coming from a statistics background, he advocates a “count, count, count” philosophy, and he subjects every line of conventional financial thinking to scientific testing.

As an example – surprise, surprise – I always thought the link between earnings and stock performance was specious at best, and thankfully Niederhoffer debunks that hoary cliché. He also trashes “value investing” and Alan Abelson, while uncovering the truth about St. Benjamin Graham. Amen, brother!

Of course, he also takes plenty of rips at technical analysis, and I can’t quibble with him. As I’ve often said, technical analysis gets you in the door, but it’s money management that gets you out, hopefully with a profit. Technical analysis alone as a ouija board? That’s ripe for ridicule, so that chapter didn’t bother me.

Quibbles? Not many. He remarks that Market Wizards by Jack D. Schwager is “one of the most well-known books on technical analysis,” which isn’t accurate. Anyone familiar with the book will note that it contains plenty of profiles of fundies. In addition, Niederhoffer’s ego occasionally shines through – more when he’s talking about racquet sports than anything else – but it’s palatable (and a lot less noticeable, in fact, than many of the “look how great I am” investment books penned by other traders). It’s also balanced nicely with plenty of mea culpas regarding his investment performance.

The net? Practical Speculation might just be the best book on trading/investing ever. Read it.

Active Trader

Reviewer: Mark Etzkorn, May 2003

In Practical Speculation, hedge-fund manager Victor Niederhoffer and financial writer Laurel Kenner blend statistical analysis and personal experience -- with insights drawn from everything from baseball to the physical sciences -- to create the best trading book of the young millennium.

Readers of Niederhoffer's 1996 book, The Education of a Speculator (as well as Niederhoffer and Kenner's online market columns), will be used to this eclectic blend of subject matter, which delights some and leaves others running for the exits. However, Practical Speculation spencs considerably more time crunching numbers and addressing details than the autobiographical The Education of a Speculator. In between more haute literary and cultural asides than a season's-worth of "The Dennis Miller Show" and a few song parodies), the authors slaughter an assortment of sacred market cows and explore the possibilities of a number of statistically based trading concepts.

The book opens with an account of Niederhoffer's sobering experience after his 1997 hedge-fund close-out, and details his subsequent pairing with Kenner and their careers as challenging and sometimes subversive financial columnists. After documenting the uninformed, pessimistic malady they feel has the market in its grip, the authors get down to attacking the problem at its roots.

The book's two major sections, "Mumbo Jumbo and Moonshine" and "Practical Speculation," represent condition and cure -- the condition being the prevalence of untested, anecdotal or fraudulent market concepts and trading ideas, and the cure consisting of application of the scientific method (gathering facts, discovering regularities and patterns, forming theories and testing predictions) to questions of market behavior and trade strategy.

In short, the authors' mantra is test, test, test (or, if you like, statistics, statistics, statistics). They reject subjective tools (such as certain vaguely defined price patterns) on the grounds such approaches cannot be statistically validated. They also show that when certain pieces of accepted market wisdom are subjected to testing, they produce results far different from their popular reputations.

A nearly militant quant, Niederhoffer demands not just that an idea be tested, but that the results are reported in terms of their level of statistical certainty. Fortunately, the book offers solid ideas about testing, as well as how to determine whether the results are reliable. Chapter 8 ("How to Avoid Spurious Correlations") specifically discusses the ways we can be fooled into thinking that something random isn't -- a scenario familiar to any trader who gets positive results in testing only to watch a strategy implode in actual trading.

Departure points for many of the authors' arguments are their critical dissections of numerous market myths, fallacies and shared hallucinations. Their first target is earnings, and their debunking of the widely accepted between earnings and future returns is a genuine public service. Other targets include technial analysis, chronic bears and value investing. It's unfortunate that Niederhoffer's failure in 1997 will make it easier for Wall Street to dismiss the criticisms he and Kenner level at it. They raise serious issues and rarely take aim at a target without arming themselves with plenty of data.

In hunting their prey, however, Niederhoffer and Kenner sometimes wield a shotgun rather than a rifle. A shotgun leaves more room for error -- you're more likely to catch at least some of your target than if you were using a rifle, but it's also a little messy and sometimes you hit things you shouldn't. Just a handful of the targets who catch some buckshot -- a few more randomly than others -- include Fed chairman Alan Greenspan, Warren Buffett, Jack Schwager, Martin Schwartz, Richard Arms, Alan Abelson, The Wall Street Journal, Tom DeMark, Active Trader and Japan.

Without commenting on this list one way or the other, while many of Niederhoffer's and Kenner's critics hit the bull's eye, others just catch the periphery, and occasionally they miss the target altogether.

One minor example of singling out analyst Tom DeMark's quote, "The trend is your friend unless it's about to end," in the chapter that attacks the vagaries of technical analysis, in general, and trend-following, in particular. However, DeMark is not a proponent of trend following; his quote was ironic and meant to highlight the inherent difficulties of trying to mechanically follow trends. Like Niederhoffer, he is primarily a contrarian.

Similarly, the authors ridicule what is depicted as ambiguous, subjective trading advice from one of Jack Schwager's Market Wizard's books. Later in the same chapter the authors report the results of tests showing the poor performance of several candlestick patterns. It's unfortunate that Schwager is not recognized for having published in his 1996 book Schwager on Futures: Technical Analysis similar candlestick tests that produced similar results.

A more significant example is the authors' wholesale dismissal of technical analysis through dissection of only a handful of methods (and focusing mostly on trend-following). Most of their arguments regarding the harmful effects of subjectivity and the lack of evidence supporting the value of many popular technical ideas and tools are absolutely correct. However, their narrow definition of "technical" excludes many techniques -- including those advocated by the authors -- that are commonly considered technical analysis, including quantifiable price relationships many traders describe as patterns.

The criticisms sometimes come off as a little too mean-spirited or lacking in perspective or balance (as in the Schwager example). Niederhoffer and Kenner talk a great deal about propaganda in the trading industry, but more than once they come very close to using the tactics they decry in others.

Regardless, a little less (or a little more focused) vitriol would have distracted less from the book's truly fruitful research and statistics, unique market concepts and great trading insights. The financial industry has more than its share of snake-oil salesmen and misguided gurus (it will 100 years from now, too). I would have happily read a book devoted exclusively to excoriating these types. But a book devoted solely to discussing market and trading ideas would have been nice, too (But honestly, the criticisms are fun to read, regardless of whether you agree with them.)

In the second half of the book, the authors argue on behalf of the ultimate power of the long-term upward bias of the stock market, suggest ways to improve on buy and hold, and present evidence showing the superiority of growth stocks over value stocks and the correlation between baseball and the market, among other topics. Chapter 14, "Practical Market Lessons from the Tennis Court," draws parallels between Niederhoffer's beloved racquet sports and trading. This chapter alone contains enough tantalizing trading insights and market relationships to keep an inquisitive researcher busy for months.

The authors illustrate many of the issues they discuss -- especially the problems of adjusting to ever-changing market cycles -- in a chapter that chronicles the failed application of well-researched trading systems based on insider trading patterns in biotech stocks. Another unique chapter offers ideas for judging the merits of a company's balance sheet -- things people can do to guard against the now well-documented habit of corporations to fudge their numbers right and left.

The book jumps from idea to idea, and may put off those who don't want to read references to Greek tragedy, Gilbert and Sullivan and chess openings in a "trading book." Niederhoffer and Kenner can be accused of pretension, but not of laziness. In writing a book that attempts to discuss trading from such a unique perspective - philosophically and culturally as well as statistically -- the authors set a very high bar for themselves (and for the reader). In doing so they invite criticism on an equally high level. This is a compliment -- the majority of trading books do not merit such serious attention and discussion.

Some people will reflexively dismiss a trading book co-written by a man who publicly lost of millions of dollars. Others may find the book's approach too non-linear or its tone too abrasive. But they'd be missing out. Despite its glitches, Practical Speculation offers more trading "truth" than a dozen typical market books combined. It's in a league of its own.

Journal Of Investment Management

Reviewer: Mark Kritzman

Vol 1, No 2 (2003), Page 83

Never have I read a book with so many analogies to investing: tennis, fishing, physics, skyscrapers, storks, chess, the Catholic Church and even the movie, Invasion of the Body Snatchers, to name a few. Amazingly, most of  these analogies are quite apt, and some reveal profound insights. And, as you might suspect if you know anything about Victor Niederhoffer, he and his co-author, Laurel Kenner, embrace controversy with open arms. Among their more provocative claims is the unwitting complicity of Alan Greenspan in the  World Trade Center attack.

I first became aware of Niederhoffer, the squash player, from players who competed against him. Although his achievements on the squash court are legendary, those he played against seem to remember more about what he wore at matches than the beatings they experienced. I also heard of Niederhoffer  from University of Chicago professor James Lorie, who would tell "Victor stories" at the CRSP seminars. Professor Lorie seemed to be especially proud to have as his namesake Niederhoffer's pet monkey. Most people in finance,  however, know of Niederhoffer as the hedge fund manager who blew up during the 1997 Asian crisis, shortly after writing a best-selling book, Education of a Speculator. These glimpses of Niederhoffer's storied past give  perspective to his new book with Laurel Kenner, Practical Speculation.

This is an unusual book - unusual in the disparate range of sources, experience, and knowledge the authors bring to bear on investing, and unusual for the original and often profound wisdom they impart about many of life's challenges. Moreover, it's unusually amusing, especially for those with a fondness for irreverence.

Practical Speculation is divided into two parts. The first part debunks many of the time honored beliefs about investing, including the merits of momentum strategies, value strategies, technical analysis, fundamental analysis, the wisdom of Benjamin Graham, and even the probity of his private life. He devotes an especially derisive chapter to Barron's columnist Alan Abelson, as a guide for detecting propaganda.

The second part of Practical Speculation offers specific advice about investing. You may question why you should care for advice from someone who failed so spectacularly. It is because prior to Niederhoffer's collapse, he  accumulated one of the best track records in the industry, and has since  rebounded nicely. These experiences provide the grist for a litany of valuable lessons, which he and Kenner impart with candor, humility and wit. They even share letters of condemnation sent to them from those who follow their monthly columns on CNBC money. "You belong in jail" is a typical refrain.

One of my favorite chapters deals with hubris. Niederhoffer and Kenner offer several indicators of hubris, including the construction of skyscrapers, appearance on magazine covers, paying for naming rights of stadiums, and  placing celebrities, knights and lords on boards of directors - the "lords on board" indicator. According to their clever statistical analysis, hubris begets underperformance while humility outperforms. They are quick to quote Dizzy Dean, though. "It ain't boasting if you can do it."

Their chapter on lessons from tennis features a series of "on the court" - "in the market" comparisons, including grass courts and random prices, inferior opponents and speculators, stamina and asset base, and racquets and Internet connections.

Some of their best advice has applicability beyond market speculation.  Intended as a guide to reduce trading costs, they offer lessons on negotiation. This chapter is well worth the price of the book for anyone intending to purchase a new car. Prepare to spend Christmas Eve in a showroom, though, if you want a really good deal.

Niederhoffer and Kenner wholeheartedly embrace the scientific method and  employ a variety of statistical tools to make their points. Fortunately, they are adept at communicating complex concepts in simple terms, though sometimes at the expense of their villains. Regulators at the Food and Drug Administration, for example, serve to illustrate the distinction between a Type I and Type II error. The FDA commits a Type I error when they allow a harmful drug, and a Type II error when they reject a beneficial drug. Niederhoffer and Kenner include a disturbing tally of the thousands of unnecessary deaths resulting from several FDA Type II errors.

Niederhoffer and Kenner dispense pearls of wisdom for both the seasoned professional and the novice about investing and much more. Though you may not agree with all that they write - I can't imagine anyone would - they will compel you to think and very often, cause you to smile.

Buy Practical Speculation. A thoughtful gift for your customers! Great contribution to your local library! 

Frozen Out in U.S., Is Acclaimed in Europe: Mainstream U.S. media have ignored our book, but European reporters are finding its ideas well worth writing about. Read the European articles>>>

Write a review of Practical Speculation on Amazon.

Read thumbnail sketches of the chapters in Practical Speculation

Note from the Authors:

Practical Speculation, the nuts-and-bolts follow-up to Vic's Education of a Speculator, hit the bookstore shelves in mid-March. While EdSpec was biographical and, above all, a love story for Vic's father, PracSpec diagnosed the problems facing investors and provided a rudder for navigating the market. Against a backdrop of  war in Iraq and predictions of doom in the market, hardly any reviewers were interested in a book that made the case for optimism and counting. Even months later, after the market had taken off again, no broad-circulation U.S. newspaper or magazine had noted the book's existence.

One reviewer who did read the book was Mark Etzkorn, editor of Active Trader magazine. He  called Practical Speculation "the best trading book of the young millennium."

Academics and traders gave similarly high praise to Practical Speculation. Unfortunately, our publisher did not see fit to advertise the book or put more than a few copies in bookstores, for fear of being charged for returns. Thus, we have had few sales, and the lack of sales has not encouraged the U.S. media to review the book. This negative feedback circle has all but destroyed a book we spent three years writing and consider the  best thing we've ever done.

Many would-be traders go down to the floor and suffer from inability to act. Just stand around and do nothing. Wait for perfect opportunity. It never comes. It happens after you've been in a losing streak also. But for our publishers, it's a natural state. Therefore, we must rely on each of you. We hope you have enjoyed our free columns on and the free information on our Web site. Now, will you do us a good turn buy buying Practical Speculation. reviewing it on, and spreading the word? Remember the story of the Chief Rabbi of Dantzig:

The house of the chief rabbi of Dantzig caught fire, and the contents of his good cellar suffered. The Jews took counsel what to do for their beloved rabbi. A handsome subscription was first proposed, but overruled; then another idea was mooted, then another, each less costly than the preceding. At last it was agreed that everyone should visit the house on a certain day, bringing a bottle of fine wine. After an appropriate speech of greeting, everyone would descend into the cellar and empty their bottles into a vat prepared for the purpose. The day came, and the chief rabbi listened with delight to the flattering addresses of his guests. When the ceremony concluded, he went to the cellar with his family, all brimful of kindly feelings, to taste the result. He turned the tap, a beautiful fluid ran into his glass; he raised it with gratitude to his lips, and suddenly his countenance fell; he slipped a second time, and confirmed that the fluid was pure water. The fact was that each guest had said to himself, "What does it matter whether I put in wine which costs money or water which costs nothing? My own contribution will make no sensible difference to the total result."

Francis Galton told the story of the Chief Rabbi at a scientific forum when a discussion of the visual imagery of numbers flagged for lack of participants. Then he said: “I trust that you who have hitherto abstained through shyness will raise their hands." A multitude of hands went up around the hall, and a lively exchange ensued.

Now, will you pour some wine in our vat?

Vic & Laurel

P.S. We always admire the person of principle, the person who will defend your right to say something regardless of whether he agrees with what you're  saying, the person who is willing to embrace the rights of others to freedom of life, liberty or property even when there's nothing in it directly for herself--the doctor who believes that licensing should be abolished, the drug company executive who believes the FDA should be abolished, the person who's against drinking or smoking but believes in freedom to drink or smoke. The person who feels that free trade is detrimental to his business, but is in favor of it on principle.

We feel a similar admiration for a good con, even when we're we the victim of it. We have written about cons in earnings and buybacks and other areas. Now we're the victim of one.  Two highly negative reviews of our book have been at the top of the Amazon reader review list for a month now.  Now, there are 39 positive reviews of our book, many with five stars, and only 4 negative reviews. The 2 negative reviews at the top of the list have received 60 votes, compared with 4 votes for the others. Placement is done by a computerized system that tallies which reviews readers say they find most helpful. Someone apparently wanted to make sure that the reviews saying Practical Speculation was "the worst investment book ever written" was what people would see first. This required such coordination and deception that you have to admire the cons with the talent to devote their efforts to such a cause. They have surely helped slow our sales to a trickle, and have made a mockery of the Amazon rating system in the process.

That's guaranteed to happen for a book like ours. However, one might forgive us for wondering, as one does with most cons, whether it might have been a better use of the cons' time, friends and money to devote their efforts to some more productive pursuit than wrongfully trying to destroy a book's sales. Exactly what motivates a person to waste so much time and effort for such a low and trivial purpose? One would guess it must be a chronic bear or technician who found their belief system jarred by our efforts to ask, "Er have you tested that?" before accepting this or that shibboleth.

It doesn't matter, of course. But it has been suggested to us that the only possible way to alleviate this situation, since Amazon doesn't respond to our letters, is for some readers who don't like to see a revolutionary book like this suppressed by the forces of evil  to vote for one other good review that has a reasonable number of votes on it already so that the cons will not keep their ill-gotten gains permanently.

Reader Brian J. Haag writes: "I have considered reviewing both Vic's books badly on Amazon. But I have read the first three times, and am on my return trip through the second. At the risk of being massively overdramatic, I feel like Dominique vowing to not let anyone see Roark's work. The masses do not deserve to read them, unless they find them and open themselves to the riches therein by their own efforts. Let them read Barron's."


Don't Be Lured Into an IPO Con Game 2/27/2003

Commission-Free Trades and Other Scams 2/20/2003

Nothing pay dividends like a new dividend, 10/31/2002

5 genuine buys on a Street of impostors, 10/24/2002

Higher dividends are no magic bullet, 10/17/2002

What dividends say about a stock, 10/10/2002

The earnings gimmicks roll on, 10/3/2002

Count on a company's cold, hard cash flow, 9/26/2002