Wednesday, April 19, 2006

Victor Niederhoffer: 2, RoW: 0

I've got a couple books by Victor Niederhoffer. I have a copy of his latest on my bookshelf. I haven't read it yet, but I plan to at some point this year because I admire all of his accomplishments, and most of all, how he deals with failure. He is still just a human, like the rest of us. I've read much of his older book "The Education of a Speculator" and various web articles he's authored and I can tell you that his biggest weakness is his romantic fancy for drama. But enough introduction. Have a look at this profound excerpt from Dave Goodboy's interview with Victor:
  • "Victor: ...I consider his (Benjamin Graham's) basic idea of value investing one of the worst big cons."

  • "Dave: Value investing is a con!? Why?"

  • "Victor: In general you get paid for taking risk in the market. The basic idea of value investing is to invest in companies that can’t lose money. If you can’t lose money there’s no profit, there’s no return, since there is an unchanging demand structure.The rate of return quickly goes down to the risk-free rate."

I don't understand people who try to run around and debunk market gospel. I've always prefered to focus completely on what does work so that I can exploit it rather than worry about identifying and catagorizing the endless strategies and techniques that don't work. I've done that with Vic's interview on Dave's site. Think long and hard about what Vic is saying here:

"In general you get paid for taking risk in the market." Brilliant! Simple. Now exploit it.

I've never done this before, so this will be sort of an experiment. I am going to have a contest on this blog, and the prize is a copy of Victor's latest book: "Practical Speculation". I'll have the book shipped directly to your house from if you are the winner.

Contestants must submit an article to me by email: Put "risk management article" in the subject line of the email. By submitting your article, you consent that your article may be republished on this blog. The deadline for submission is June 1st. I will announce the winner some time in June and republish the winning article here on the blog at that time.

Your article should touch on these items:
  • Real-life examples where return is highly correlated with risk.
  • How can risk be calculated?
  • Why is return a function of taking risk?
  • Under what conditions this assertion breaks down (if any).
  • Optimizing return: minimizing risk vs. managing risk.

I don't care if you want to focus on bond holding, swing trading, day trading, no-limit poker, horse racing, monopoly, or any other games where risk is involved. I'll also accept articles that seek to debunk Victor's assertion: "In general you get paid for taking risk in the market."


At 11:20 PM, Anonymous Anonymous said...

The contest is a good idea, though I'll leave my feeling here.

Niederhoffer's take on value investing in that excerpt doesn't seem practical to me, so the new book title is interesting. Value investing, like any other category, is not free of risk nor should it be dismissed out of hand. There appear to be quite a few investors that have managed to make due by applying Graham's theories in their work. I think they might quibble about that rate of return.

Sure risk goes hand-in-hand with reward. Whether one ultimately benefits or falls short, it takes courage to take action. History would suggest the gamble can be well worth the risk, but your odds invariably increase when armed with pragmatism.

Best wishes, particularly to anyone thinking of skydiving without a parachute.



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