Vol. 9 No. 8 (April 1997)

In the following excerpts from Full Context's conversation with Niederhoffer, he and editor Karen Reedstrom discuss his new book, The Education of a Speculator, the monthly "Junto" meetings which he hosts in New York, Alan Greenspan, markets and other things ...

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Q: Where did you grow up and what ideas or events influenced your early life?

Niederhoffer: I grew up in Brighton Beach, Brooklyn, New York, at the edge of the town of losers, where the mere mention of the town causes a raised eyebrow and a snicker. The ideas that were keen in my upbringing were love of family, music, books; an interest in sports, scholarship, and teaching—building the highest edifice possible from the limited raw material available.

Q: Tell us about your father and the role that he played in your life.

Niederhoffer: My father was the greatest man I have ever known. He played a crucial role in my up bringing. I liken him to the Norse God of justice, Baldar. He was a good and complete man, perfectly balanced teacher. He loved life and he was extraordinarily strong and kind and he was a formalist; he loved to do things the right way. He was immensely talented; he could ice skate, dance, play tennis, football. He spoke nine different languages; he was omniscient, like Mycroft Holmes. He was a policeman and a teacher. While he was on the police force, he studied for his Ph.D. He became a revered founder and teacher at the police college in New York called John Jay College. He loved his kids, he was a hands-on parent, he liked to say he was always there for the kids. He was immensely creative; he had a million controversial ideas about every aspect of life. He wrote a number of very important books. His book Behind the Shield used to be considered the main treatise on police life. He wrote another one called The Police Family, which is a classic, and he wrote one called The Gang, which is a path-breaking treatise on gang formation. He was a warm, wonderful guy who never did anything bad in his life but got dealt a bad hand by being stricken with cancer at the age of 55 and he died five or six years after. It was mainly to transmit some of the traditions he raised me with, and to tell some of the good stories and talk about the influence he had on me, that I decided to write my book The Education of a Speculator. I made a trade: I would teach the readers how to speculate if they would agree to listen to my family lore. I have been amazed at how many people have found that trade worthwhile.

Q: I have been enjoying the book. Would you say that the book is for the general reader or more for the professional involved with investment?

Niederhoffer: It’s for the general reader. I believe everyone is a speculator. Speculation crops up in all aspects of life. I define it as hastening the inevitable with your actions in the face of an all too unpredictable future. Everyone is a speculator, not only in his financial life, but also in his career, his romance, and his retirement and family. It is in the entire decision-making practice. The book is for everybody, and I have been very pleased that hundreds of people have read it and said to me: "I never knew I was a speculator! I do this all the time in my own business and I got so much out of this!" The book sold over a hundred thousand copies in four or five weeks, is in its fourth printing, and, on the Amazon book service, it was number one out of a million different titles. Bill Bradford, the publisher of Liberty, which is my favorite magazine, said one of the nicest things to me: "It shows that the readers out there are great, and that we have a wellspring of good people who can really appreciate something." My book gets to the root of speculation; no one has ever thought about speculation the way I have, and you can never think about it again in the same way.

Q: You received a Ph.D. in finance. How helpful was your college education to your experiences in the business world? Did your professors’ theories stack up well in the real world?

Niederhoffer: No, the professors at Harvard were collectivists; the only mention of free markets was as an object of ridicule. Milton Friedman was almost a dirty word. Economists now don’t even pay attention to the dogma that was taught me as the be all and end all.

Q: Why do you think that is?

Niederhoffer: The generation above 50 is still the generation raised on Samuelson—they had no care for, and paid no attention to, the individual. They looked at the aggregate of things; it didn’t occur to them that it would be wrong to steal from group A to help group B. The theory of diminishing marginal utility was used to justify intervention.

Q: What was the main influence for changing some of those ideas?

Niederhoffer: First is the appreciation of individual effort and heroism as exemplified in the works of Rose Wilder Lane, Ayn Rand, and others. People now realize that we have to take into account efficiency. Empirical work shows that when you rob Peter to pay Paul 98% of the property that you rob gets siphoned off into bureaucratic waste and inefficiency. Everybody realizes now that politicians are human too and that they want to make money. This led to questioning the efficiency of the transfers, and then the ideas of Von Mises and Hayek began to filter throughout the collective consciousness. Then there are those who have learned from Ayn Rand that people are entitled to pursue their own happiness and the purpose of government is to pluck the geese with the least amount of hissing. All of those tendencies, along with the fall of the Berlin Wall and the collapse of Soviet Russia, has had an impact on the new generation. This is very important for a speculator. I was very fortunate when I was learning about free markets to read Albert J. Nock’s The Memoirs of a Superfluous Man, one of the five best books I’ve ever read. It’s up there with Atlas Shrugged and Rose Wilder Lane’s Give Me Liberty. Anyway, in Nock’s book he has a complete analysis of the real function of government and how to understand it. He says right up front that he always treats government as if it were a professional criminal class, and I apply this to markets over and over again. When the markets are in a vulnerable stage and an election is coming up I ask myself what are the politicians going to do to try and manipulate the stock market so that it will stay high enough for them to get elected.

Q: How did you get started in business, did you work your way up through the corporate ladder or begin with your own business?

Niederhoffer: No, I am an original. I started applying the scientific method that I had used in my gambling and my sports to investments. At that time, the scientific method did not advance from where it was in the Dark Ages for stock market analysis. I wrote my undergraduate thesis on that subject, called The Non-Random Characters of Stock Prices, and then I started consulting for mutual funds and investment companies and so that’s how I got in business.

Q: So, does your theory work?

Niederhoffer: So far, my theory works. I am one of the most successful speculators of all time. I have made hundreds of millions of dollars for my customers and myself. My total gains are probably over a hundred million; my total losses are probably under a million. That’s for all my customers that I’ve had from my beginning 17 years ago. I trade based strictly upon the statistical aspects of the market overlaid with my theory of the market as an ecosystem, with the various trophic levels corresponding to producer, consumer, secondary consumer, and reducer. Trophic level 1 I liken to the public, the dealers, the hedge funds and the brokers. I have this interactive theory of the market, subsumed within statistical analysis, as an interrelation between these levels all overlaid by the political economic structure of politicians as crooks trying to augment their power.

Q: Do you figure all this out with a computer?

Niederhoffer: Yes, I invented the first programs in what they call intermarket analysis. I invented them about 20 years ago.

Q: Can anyone buy them?

Niederhoffer: Now anyone can buy them, it’s almost a cliché on Wall Street. Everybody talks about intermarket analysis. You know, if gold goes up bonds are going to go down, stocks go up and the stock market is going to go down. If the U.S. market goes down, the Japanese market will. But the way they study it is with charts overlaid on each other, and charts are totally worthless pieces of trash. The kind of analysis people make for their speculations is the kind that a high school chemistry student would get a F on if he dared to present a paper with that kind of information on it. Yet, it subsumes all market charts and anecdotes. There is no account of the variability, no attempt to quantify hypotheses, to evaluate riskiness and reformulate hypotheses. [...]

Q: The market has been acting rather skittishly lately. Alan Greenspan sneezes and it falls. What do you make of this latest trend and does it warn us of anything bad in the future?

Niederhoffer: No, there is no reason for Dr. Greenspan to be talking about the overvaluing of the stock market if he planned to lower the boom on it. Greenspan had a million abstruse indicators that are as dated as the dodo. The Fed is using the kind of things that, in your neck of the woods, they used when Cleveland was the major industrial city of the U.S.: freight car loading, blast furnace usage and quit rates among manufacturers were their key indicators. People like Greenspan have forgotten that the economy now is the information economy and the computer economy and the global village. It used to be that 70% of GNP originated in the manufacturing sector. Now the number is 20-25%. The idea that the market is more volatile is incorrect—the volatility of the market is probably lower on average in the last two or three months than it has been in the previous ten years. They quantify volatility, daily price movements relative to the absolute level; it is about 13-14% now, which is a pretty low level. If the Fed Funds rate were to be increased, it would ultimately be bullish. The main thing that affects stock markets is interest rates. When the Fed is trying to reduce inflation and increase their vigilance on the inflation front, that would tend to increase the multiplier appropriate to earnings.

Q: So, what do you think of Greenspan?

Niederhoffer: What all your readers know about politicians is true: when a man gets a hankering for politics rottenness grows in his soul. The only thing a politician can think about is his own party and his own welfare. If there is anything left, he will start thinking about how something will effect the public good. The idea that the central banks are altruist and have a grander plan for how society should be structured is loathsome. They are politicians and they are interested in creating the World State and maintaining their power and perks, maintaining their access to the outside world through fantastic multimillion-dollar jobs after they leave. Their mission statement is impossible. They can’t balance inflation vs. output vs. the dollar. It’s becoming more and more political and Dr. Greenspan showed his true colors by sitting between the two blondes at the first inauguration. The Fed is like any other government bureaucracy.

Q: I have heard that the smart money is getting out of the equities market. Have you observed this, and if true, what does this mean?

Niederhoffer: I really have no more to offer than anyone else in the phone book, but there has been the most massive infusion of capital into the equity market in history. There’s a whole new paradigm and its very much related to the fall of the Berlin Wall, and to the increased amount of free trade and the dynamism of the information economies and reduced inflation. People should be putting their money in equities. It’s the proper role for them to play, lending money to entrepreneurs and getting a positive long-term rate of return over the last 300 years. Every market around the world has returned about 10% a year for any period longer than three years. So, people are doing the right thing. They are taking their money out of bonds and they are putting them into equities and increasing their overall return. They are not concerned about panic and after they read my book they will be even better situated; they will play their role even better. There is the phrase: "The market will always climb the wall of worry." People have been waiting for this 1987 crash to occur again for the last ten years and during that time the Dow has gone from 2000 to 7000 in its greatest ride in history. There are certain investment papers and letters, that have been waiting for that second shoe to fall for the last ten years and this worry is completely mislaid.

Q: What do you think of George Reisman’s new book, Capitalism: A Treatise on Economics?

Niederhoffer: It’s magisterial; it’s mastery; it’s one of the five best books I’ve ever read. It is the modern updating of Human Action and of Capitalism and Freedom and Murray Rothbard’s Man, Economy and State. It’s in a class with Atlas Shrugged. It is one book that should be on every free market person’s library. It’s a wonderful tribute to human ingenuity and persistence. Q: You hold monthly Junto meetings. Tell us what this group is about and what kind of people attend? Niederhoffer: I was reading in Benjamin Franklin’s autobiography that the most valuable thing he ever did in his life was to have a series of meetings with a dozen of his friends where they would try to make contributions to natural philosophy as well as their individual welfare. He kept it going for 50 or 60 years and then it spontaneously lasted for several hundred years. I always had tremendous respect for Doug Casey of the Eris group and I tried to model a group halfway between the Eris society and the kind of group that Benjamin Franklin had. I invited people interested in free markets and the idea was to have one paper from the point of view of liberty to give us something hard to bite into and then discuss it and have a lot of feedback. And it has spontaneously grown. We have it once a month, almost always on the first Thursday. It used to be at my office in New York until they chased me out of New York with their excessive taxation. Now it’s held at Eastbridge Capital.

Q: How has the Junto evolved through the years?

Niederhoffer: We started out by trying a few different formats but we coalesced on a format that works. We have about an hour where members unload various things about liberty in the news that they have a particular insight into. Then we have an invited speaker who talks about his own work on the forefront of individualism or liberty, and then we have a very animated discussion and feedback. In our group, we have experts on almost every subject. Once, at a meeting we had someone talking about Japanese business. The speakers always tell us that it’s one of the most dynamic experiences for them. People write to me from all over the U.S. that they love my Junto, that it is one of the highlights of their life, and that they hate to move out of New York and never be able to find anything like it. I finance it, pay for the speakers, and the sandwiches, and I’m very happy to help young libertarians and Objectivists out.

Victor NiederhofferVictor J. Niederhoffer is a Harvard graduate and earned his Ph.D. in finance from the University of Chicago. He is Chairman of Niederhoffer Management, a futures trading firm with approximately $125 million under management. He makes sure all of his employees have read Atlas Shrugged. He has served as advisor to, and investor for, George Soros and as mentor to Monroe Trout and other financial wizards. Niederhoffer is also a five-time U.S. national squash champion. Among his publication credits are articles in Liberty and The Wall Street Journal, a cover story in National Review exposing Hillary Clinton's cattle trading as a façade, and his book, The Education of a Speculator, which is a current bestseller.

This excerpt represents little over 1/3 of the interview with Mr. Niederhoffer. To read the full text, you may order a copy of the September 1997 issue of Full Context here.

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