chk999 (99.98)

That Was One Weird Book

December 02, 2007 – Comments (0)

I picked a book up at the used book store for cheap some months ago, but didn't get around to reading it away. Events since I bought the book have added considerably to the humor in the situation, you'll see why in moment.

The book is Practical Speculation by Victor Niederhoffer and Laurel Kenner.

The book seems almost like two different books that had the chapters shuffled together at random. Some of the chapters are very good, such as the one that give technical analysis a good thrashing, or the one that talks about celebrity CEOs being bad for returns. Some are wrong like the one where he shows that he doesn't understand how pricing at the margin creates and destroys wealth. Others are just weird where he uses racket sports truths as analogies for the market, or an attempt to find a thermodynamics of markets.

In a fair number of the chapters he takes pokes at many people that he is angry at. This is an old and time dis-honoured way of writing a book. (See Margaret Cho's latest opus for a sterling example.) But you have to very careful when you do it, because the gods have a most strange sense of humor and you might find yourself on the wrong end of it.

Cases in point. In his chapter attacking Ben Graham, Niederhoffer takes a gratuous shot at Ben's (complicated) love life. But in the interim, VN and LK have had a son together while VN is still married to the mother of his 6 daughters. (Four of whom are named after characters from Ayn Rand.)

In other chapters, various shots are taken at Warren Buffett. But in the time between the book being written and me reading it, VN's funds have blown up for the second time. So the score currently stands as WB: 2, VN: 0.

There is actually very little specific investing advice in the book. But from reading about these blow ups and Amaranth and LTCM, the common thread is leverage. And this makes sense. If I am long a postion and the market moves against me, I don't have to do anything. If my evaluation is that the investing thesis is still correct, then I can just wait for the market to realize it. But if I am heavily leveraged, even a small move in the wrong direction is enough to wipe me out. At 50 to 1 leverage, a move of 2% the wrong way wipes me out. VN's Matador fund was closed recently after heavy losses.

I plan on trying to be more like Buffett than Niederhoffer. I will be conservative on leverage and buy great companies that I think I can hold for a long time. I will ignore market action other than to see if it affords a good buying opportunity. I will try to stick with companies that I think I understand. And I'll keep some money invested in BRK because I want a fabulous investor working for me.