Daily Speculations
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Victor Niederhoffer and Laurel Kenner

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An Edge, an Education, a Beer, and a Burger

In the game of poker, the net expected return for any participant assuming random outcomes is zero. For every winning amount there is an equal and opposite losing amount. If you are playing in a casino, the expected return is zero. Poker becomes a loser's game due to the house cut. Therefore, to enter into a poker game at a casino, one must have an edge to rationally expect to come out ahead.

The same holds true for trading stocks. Now, buying and holding a broad base of stocks is a winner's game. That is, the average participant can expect to come out ahead over time due to the long-term positive drift in the stock market. Relative to that long term positive expectation, however, each individual stock trade is a loser's game. For each trade, there is a winner and a loser relative to the performance of the overall stock market. It is a zero sum game without transaction costs, but of course Wall Street gets its cut, making it a losers game. Therefore, to make any trade outside of purchasing a broad based stock index, one must have an edge in order to rationally expect to come out ahead.

This of course raises the fundamental understanding of what an edge is, and how one can get an education that allows for the discovery of an edge that can be turned into profitable trades. Here, I differ from many in the investment community. One of my primary beliefs is that the answer to most problems arises not out of complexity, but rather out of simplicity. This belief is applicable not only to the understanding of an edge, but also to the influence of education on the attempt to find one.

What an edge is, and the education of a trader are in fact inextricably linked. There is a reason for this: An edge is something that, when acquired, comes at the expense of every other participant in the marketplace. As a result, the education that one is told to acquire consists precisely of indoctrination in to a way of thinking that precisely takes away ones ability to find an edge.

DailySpec teaches that trading doesn't exist in a vacuum, separate from culture and the world around us. Rather, the everchanging cycles of life provide clues to the everchanging cycles of the markets, since the markets are an extension of the individuals who make up culture and history. Many DailySpec authors take clues from their rich cultural educations and apply them to trading.

These are excellent contributions, but often go against my belief that the answer lies in the simple as opposed to the complex. Therefore, I offer my observations not on say, my knowledge of Wagner's Ring Cycle, but rather on the simple but excellent film Outlaw Josey Wales, in which we see not only the importance of the edge, but how society seeks to educate a man in order to get him to lose his edge.

This concept is introduced when Josey crosses the path of Lone Watie, loosely based on the historical Stand Watie, a Cherokee and the last Confederate General to surrender. As Josey flees from Missouri on his way to Mexico, he crosses into Indian Territory, present day Oklahoma. At this point, Josey has a major reward out on his head, and in addition to being chased by Union cavalry, has already had to deal with locals looking to turn him in for reward money.

As Watie senses someone passing through his land, he picks up his gun to surprise the interloper. However, Wales sneaks up behind Watie and draws his gun on him:

Wales: (Pointing his gun at Watie) Howdy.
Watie: Howdy.
Wales: The name's Josey Wales.
Watie: I've heard of that name. Some said you'd be heading this way. And they said a man could get rich on reward money if he would kill you.
Wales: Seems like you was looking to gain some money here.
Watie: Actually I was looking to gain an edge. I thought you might be someone who would sneak up behind me with a gun.
Wales: Where did you ever get an idea like that? Besides it ain't supposed to be easy to sneak up behind an Indian.
Watie: (And now we see how society seeks to "educate" people to lose their edge) I'm an Indian alright. But here in the nation they call us the civilized tribe. They call us civilized because we are easy to sneak up on.

Later, Watie, dressed in a frock coat and top hat, continues:

Watie: I wore this, uh, frock coat to Washington, before the war. We wore them because we belonged to the five civilized tribes. We dressed ourselves up like Abraham Lincoln. You know we got to see the Secretary of the Interior. He said "Boy you sure look civilized." He congratulated us and he gave us medals for looking so civilized. We told him about how our land had been stolen and our people were dying. When we finished he shook our hand and said "Endeavor to persevere"... They took our pictures and the newspapers said "Indians vow to endeavor to persevere." We thought about it for a long time. "Endeavor to persevere." And when we had thought about it long enough, we declared war on the Union.

In the above exchange we see, in its simplest form, the concept of an edge. We see a future speculator educated, or in this case "civilized", specifically so that he will lose his edge, and we see ultimately the proper response of any speculator to the business schools, the professors, and Wall Street. The declaration of war on them.

Later on, after Watie and an elderly woman are being held captive by a large group of Comancheros (white men who trade whiskey and guns with the Comanche) we see the application of the edge. As Wales approaches the Comanchero wagon train, Watie, bound by his captors, says to the elderly woman: "I figure this way, we're facing the sun, this ought to give him an edge." And as you might guess, it does, and Wales kills the Comancheros.

Aside from the application of the edge, and the education of a speculator, we also see in Outlaw Josey Wales a character that all of us in the markets are familiar with: someone compelled to play, even though he knows he will lose. Hunted by bounty hunters in addition to Union cavalry, Wales is confronted in a bar in Texas:

Bounty Hunter: I'm looking for Josey Wales.
Wales: That'd be me.
Bounty Hunter: You're wanted, Wales.
Wales: I reckon I'm right popular. You a bounty hunter?
Bounty Hunter: Man's got to do something for a living these days.
Wales: Dyin' ain't much of a livin' boy. You know this isn't necessary, you can just ride on.
Bounty Hunter: (Leaves bar, but then comes back) I had to come back.
Wales: I know. (Guns him down)

Outlaw Josey Wales also has a few interesting cultural aspects. Leaving aside the strong role that chewing tobacco plays in Wales's fighting habits, there is an interesting scene in the movie shortly after Wales joins up with Watie. At a trading post just inside Indian Territory, there are a couple of references to "good brewed Choc", and "a bucket of that Choc".

I had always wondered what that was, and after I moved to Oklahoma I found out. Choc is short for Choctaw, a wheat beer that has been brewed in this territory for a long time. After many German immigrants moved to Eastern Oklahoma, they took over this heritage from the Choctaws. It has been brewed the same way almost continuously, even while it was illegal. It is currently brewed in Krebs, Oklahoma. It is double fermented, resulting in a layer of yeast at the bottom of each bottle.

I recently was able to purchase some Choc in a liquor store, although I first learned of it while eating my favorite burger, the Iron Burger at Iron Star Urban BBQ in Oklahoma City. As far as I know, Iron Star is the only location in Oklahoma City with Choc on tap.

The burger is astounding. On top of it is an inch thick sausage, sliced in half so that the burger in essence has a half-inch of sausage on it. In addition, the burger and sausage have home made chili and then melted cheddar cheese on top. A number of sides are available. The fried okra is the best. Usually okra is chopped up before frying, but at Iron Star they fry it whole.