Victor Niederhoffer
The Education of a SPECULATOR
By VICTOR NIEDERHOFFER
John Wiley & Sons, Inc.
I wish I was the fish, he thought, with everything he has against only my will and my intelligence.
- Ernest Hemingway
The Old Man and the Sea
I am an old trader, and I trade the yen in the cash market. I once had the best record among all the traders. I was rated number one in my field, and my picture was in all the newspapers. Customers crowded my doors. The attractive currency brokers talked sexy to me, told me where their customers' stops were, and where the central banks were buying and selling. The great Soros more than once called to have me trade for his own account.
But I got in over my head. I bought the dollar when the dollar:yen was 93. It went to 88 in just a few hours. I was eaten alive. The banks will not give me credit anymore, and many of my customers have left. I still have some customers--people who are not happy with feeding all their money to the stock market. They are afraid that it will crash as it did in 1929 and 1987. They look to me to land a big return, but without risk or drawdown. I can do it; but they don't want me to gamble, and I cannot do it without gambling. The risk creates opportunity. Still, I am humble because I have lost many times.
Lopez, an 18-year-old student from Mexico, worked at my side for free, just so he could learn from me. He ran computer programs for me, got me tea, and woke me when I was tired. Lopez has now left to trade at a more successful firm in the daytime, but he comes to visit me after hours. "Victor," he says to me, "I could help you tonight. We've made some money together."
"No," I say, "You're with a better firm; stay with them."
"But I remember how the dollar went down for 10 days in a row and you kept buying it. And then it went back up, and we made back all we lost and more."
"Yes, but now the dollar is going up and we're selling it."
"The Bank of Japan and the U.S. Treasury want it up; everyone in the world wants it up and I am fighting it. I am already short $300 million and the forces are against me."
"Can I get you some tea? The dollar's been up many days in a row. Let me run some programs."
"Yes, of course. Between traders," I say.
"Victor, the patterns are bearish. Can I sell alongside?"
"No, you are too young to risk everything. You have to learn to sit it out when the tide is too strong."
At 7 P.M. in New York, it is morning in Asia. The sun is shining there. Men in white shirts are preparing for battle. The banks will wait for their customers to sell the dollar to hedge their export earnings, and then they will buy it. They have a great advantage over me, for I have been sitting in front of my monitor, staring at the screen, eyes burning, for two nights and a day, and now part of another night. They drink sake each night with their friends from school and the ministries, and they learn what is going to be announced and where they will be buying and selling. When the poor folks, the outsiders, demand an investigation because a number was leaked, the Central Bank says no investigation is necessary because leaks are impossible.
When I visited Japan, I saw the hotels where the white-shined men sleep in little coffins on nights when they are too drunk to get home safely. When they do get home, their wives massage them and dress them and put them onto the bullet train for their two-hour commute to work.
My wife has gone to Maine with the kids. She is worried. "Why not get out and call it a day? You can't seem to get it right this year."
"No, It's bearish," I say.
The waters are very deep. Maybe too deep. The Japanese trade balance is scheduled to be announced. If the surplus is lower, there will be no need for the United States to bash the dollar down to save American jobs in the Rust Belt. The dollar will rise, and I will be buried because I am short an amount ten times greater than my worth. Already there are rumors that the surplus is lower. The Bank of Japan is said to leak news of this to cushion the blow of the announcement. Japan has been running a $50 billion annual trade surplus with the United States.
The current Assistant Secretary of State has said that this surplus is unacceptable. I knew him when we were boys at Harvard. He was known as an economist then. Now he doesn't say a word unless it will help his boss. I have to eat, so it is well to know what's good for the Democrats. The great Soros is a Democrat, and he is rich beyond the dreams of such as I. Maybe I m not as rich as he because I went to Chicago after college.
I dialogue with myself. "I wish that I had never met Milton Friedman or George Stigler, or his son Steve, or Jim Lorie, with their liberalism of the classics.
"Fool! Is this the way for a friend to talk? You love these men!"
"Yes, I revere them, but they make me poor."
"Poverty does not matter!"
I don't talk during the trading day. Noise distracts me from the job at hand. When I played squash, I would wear a sock on my hand before the match so that no one would shake my hand and distract me. But now I talk to calm myself. I should not talk out loud even when there is no one around to think I'm crazy.
I used to listen to music when I traded at night. Now the CD player is broken, and I don't wish to spend the money to get a new one while I am having losses. Besides, in the time it would take to turn on the music, something big might happen to the yen. That would be just my luck, to have the dollar spike down in the two seconds I was away. I need some luck today. But it is better to use my knowledge and tricks than to count on luck.
I think about music. About all the funeral music my traders play when I am down. The Mozart Requiem, Beethoven's "Moonlight" sonata. Why couldn't I be long the dollar rather than short? I want to cry. The Beethoven Marcia Funebre has a complete cycle in it, from high C sharp to low G sharp and back, in four measures. The dollar:yen has gone down from a high of 105 to 80 and now it is back to 93. What if it goes back to 105?
Now is not the time to think about cycles or music. Now is the time to think of only one thing: the yen.
My only hope is the Bank Negara, the terrible central bank of Malaysia. Bank Negara is like a pirate. It trades violently and takes no prisoners. It is happy to wreck me and my fellow traders. So far, it has lost $10 billion, almost bankrupting the country, by always going against the dollar and bonds. The Malaysians like to stampede the market at 7 P.M. New York time. If they call up all 50 banks in their network at the same time, in Australia, New Zealand, and Singapore, and sell the dollar, I may be able to take my line back with dignity.
A man should never give up hope. But it is better to have science. I know what happens to the yen when the soybeans are up and gold is down. If good luck comes, I will be ready for it.
Soros is long the dollar. He is always with the force when governments and businesspeople want something to happen. His father taught him to survive when the Gestapo was interning the Jews in the concentration camps. My father is dead because he listened to the big shots at the Memorial Hospital, who then shot him up with chemicals that destroyed his heart and lungs.
I played tennis with Soros last night. I hope he is playing tennis now, so he will not be able to buy any more dollars for a while. I wonder whether my father could beat him in a tennis match. We hardly ever lost when I played doubles with my father. When I play with Soros as my partner, I almost always lose. But that is because Soros pays the pros to play against us. The exchanges, the Treasury, the trend followers, the banks, the politicians and policy makers are all against me now. Now is not the time to think of my father or Soros, or fellow traders. Now is the time to do only one thing: watch the screen.
Bank of Tokyo flashes a price of 93. An Australian bank, the Westpac of Sydney, flits over the waters offering dollars at 92.75. But the fish are too big for it. It's gone in a second and now DKB Bank of Tokyo is bidding 93. That's bad. They always seem to know what's going on first.
Just then, I see the dollar: mark drop sharply. Union Bank of Switzerland is offering it down. "Be honest like your country," I say. The mark and yen often swim together. Bank Negara must be hitting the dollar while Europe is asleep. What a huge trade. 1.50, 1.49, 1.48. Please now, move to the yen. Mark:yen must follow. The yen is cheap. Come on, the yen is lovely.
I wish I were rich and powerful. The most important banks would request my advice. I could influence prices directly. I would put up my bids on the Telerate like the other big fish. I could afford direct lines to the banks. Best of all would be a Reuters dealing machine. I would contact four banks at the same time and hit them before they change the yen. Rothschild himself would tremble. I would discuss good books with the learned. Now I must deal with brokers. I pay them points to trade, so I always start behind. The banks know I trade through brokers. When the brokers call on my behalf, the banks change their course and trade ahead of me before I can catch them. It would not spoil the master plan if I were a rich man.
Now, I'll put in some orders with the broker to sell dollars at 93.50. I'll let them have those dollars where they want it. They won't know it's me. Please take it. Come on now, it's beautiful! They can't leave it this cheap. But they don't take it.
Now I see the Deutschebank circling. They offer to sell the dollar at 1.4850. This is good. Where there is collar: mark selling, dollar:yen selling will soon follow. My phone rings. They are beginning to buy dollars from me at 93.50. "Sell very carefully," I tell the broker. "Take a few yards only. I don't want to frighten them away."
The buying stops. Go down, dollar. Please fall back. I can't hurt you. I am just one old man. I wait with my orders back in full size. Don't be afraid. Please come back to 93.50. Buy my dollars, yen. Smell my millions, hard and cold. Eat them, yen; eat them.
Yes! Three phones ring at the same time. They have swallowed the bait. I have let out a line $100 million long. What a buyer. That must be Bacon. Or Jones. He took my bait as if it were a sardine. I will give him more line at 94. Take it. Price does not matter to you. Give me the edge, not the Bank of Japan. Then you will be so far behind that, in the morning, when the stock markets in Europe sink, I will kill you.
I love you, yen. You are so orderly, so loyal, like your country. I don't hold it against you that you would not take my dollars when I tried to buy food in Tokyo for my family of eleven. Now take my dollars. You feel the gaijin. are dirty. They will not take their shoes off in your crowded restaurants. But I do take my shoes off. I'll build a rock garden and sit and pray to Shinto gods if you'll just take my dollars at 93.50 and then go down to 91.
I know that you want to go down, dollar:yen. The earthquake created tremendous demand for dollars to buy foreign goods from the industries destroyed in Osaka. I realize that your economy is in recession because the West cannot afford to buy your goods at these high prices. But please go up a little first. Fool some buyers into thinking you want to go up. Then, when they sell, you'll go down even harder.
Nothing happens. The dollar is going up steadily. I feel it drawing my balance lower and lower. What will I do if it keeps pulling me down? My brokers will give me a margin call if the dollar goes any higher. 94.00, 94.25, 94.50. I just lost another $4 million. Turn down, dollar. Please go lower. I'd better sell some more dollars to feign strength. They should not know how weak I am. All right. Sell ten yards of the dollar at the market. That will kill the dollar.
The dollar takes my selling like I am a minnow. The dollar is pulling my house along with it.
I am afraid. I have gone too far. The Japanese trend followers will all jump in if the dollar goes above 95.00. The bubble will drown me. The Japanese are very brilliant. Their nine-year-old schoolchildren solve problems that Harvard and Williams students could not solve. But they run in herds. The nail that sticks out gets hammered. If the dollar sticks up any higher, the entire Japanese trading community will jump in to buy it. A higher dollar will become an ever rising bubble.
I wish Lopez were here. I need tea. I need to see what happens when the dollar is at a new high at 8 P.M. on a Tuesday. But he has seen me lose too many times, and he is with another shop. I wish I were young again. Then, if I lost, I could recover. Now it is too hard. When I go out with my wife, I get asked if I am her father. I must survive now so that my children and Susan will live.
Please, I beg of you. I pray: Slow down, then go down. Shame on me. How can one who has no superstition pray? Francis Galton did not pray. He thought of his shared heredity with all other creatures and this made him reverential. But the priests do not die older than others. All my praying will not make the dollar go down. I am a man, and I must do my work.
If the dollar goes up any higher, my customers will kill me. My partners will look at me and say, "We told you not to sell the premium." Then they will say nothing. They will go home to their families and say, "We lost. We're in trouble. Victor did it again."
The dollar is now open in Tokyo. The dollar cannot go up as long as I sell it, and it will not go down until I buy it back. We are in a dead heat.
No one should be alone in his old age. I should be with my six daughters in Maine. But I cannot even urinate for fear that the move down will occur.
Here is the Japanese Ministry of Finance head saying that there is no danger of the discount rate in Japan being decreased again. It is already just 1 percent. That is good for me. The dollar will go down if the rates are high. But the Japanese traditionally deny that they will decrease it three times before lowering. This is their third denial. All the traders know this and the dollar goes up. It touches 94.50.
The Japanese surplus will soon be announced. If it is lower, I will go under. How can I stay in when all hinges on a number that all the traders in Japan already know about! The direct line rings.
"Victor, do you have any stops?" my broker asks. If I tell him, then immediately the price will go to that level and I will be dead. "I don't believe in stops," I say strongly. "Yen, I will stay with you until I am dead," I say softly. The yen will stay with me, too. But I am as patient as the yen. I played squash every day for ten years in a row before winning the big one. I have been watching the screen for 52 hours without sleep. And I am not going to give up.
The yen is my friend, and there is a full moon out. The trends often change when the moon is full. The moon affects the markets just as it affects women, crops, crime, and the tides. I am afraid I have as much chance of killing the dollar as of killing the moon. Still, I will not fail for lack of effort or preparation.
I'm hungry. I have not eaten since lunch and the gnats are starting to come in through the window screen and are biting me all over. Perhaps I should stare at the computer screen harder. Will that make it turn in my favor? It's all I have left.
Just then, the dollar jumps down. Hail to the Chief. The Chairman of the Eminent Persons Council, generally thought to be a mouthpiece for the Administration, is speaking in Japan. He calls for an equilibrium dollar of 80. The dollar drops to 94, 93, 92. Yes! Dollar holders are desperate to get out. This is what I was born to do. To take their dollars when they are afraid to hold them. To give them the dollars back when they want to sell me their goods. I end up with all their dollars and all their goods.
I must buy $400 million without anyone's knowing, or else I will turn the market. But I am all alone. And brokers will rush ahead to buy as soon as they know what I'm doing.
I pick up two phones and press the speaker on another. "What's your dollar bid and offer for 12.5 yards of yen?" I say. I wait a second and then say, "I buy dollars." And with three words, I just bought $375 million against the yen. I am whole again.
I call Susan. My mouth is dry and my ulcers are violently painful. "I'll be coming to Maine tomorrow," I say. "Are you alive?" she asks. "We both killed each other," I say.
I go hit some balls on my racquetball court before finishing my job and writing up all the tickets. But my job is not over yet. I still have 2.5 yards.
By the time I get back, the sharks have hit me. The trade surplus is announced. The dollar moves to 93. I lost a quarter million on just those 2.5 yards, but I just made $3 million. Not to worry. I throw on 4 more yards just for the fun of it.
But then the sharks begin to attack with horrible fury, as if they were maddened by my escape. The Bank of Japan buys dollars. The rumors were true, after all. The price rushes to 94, with resolution and malignancy. It was too good to last. Why did I do something for fun? I never have fun trading. It is too serious. I just dropped a million.
My nerve is going now. I close out all my positions. "I shouldn't have sold so many dollars," I say, "both for your sake and mine."
Like he fisherman in The Old Man and the Sea, I think, "Fish that you were, I am sorry that I went too far out. I ruined us both. But we have killed many sharks, you and I, and ruined many others. How many did you ever kill, old fish?"
I fought the dollar in a battle to the death. Shortly after I covered, the Bank of England, the Bundesbank, and the Federal Reserve (acting for the Treasury) all intervened to buy the dollar. By the next morning, the dollar rose to 98. Had I not bought it back, I would have lost $40 million, about 100 percent of my capital.
I am sore from my wounds. I feel like the sole survivor from a plane crash. I am tired. Before I leave, I check my faxes. A memo from my lawyer informs me that a certain agency wishes to review my filings for the past 10 years. Two boxcars of documents.
The sharks are always circling, always tearing at my flesh. Hades, go away; you can't have it. It's mine. I've paid my dues. I cannot keep the sharks from hitting me. They are very powerful and do what they please. But I will continue to fight them while I have strength. I have my resolution, and there are many things I can do.
As I leave my office, my partners are coming in to pick up the pieces of the trades and even out the weights. "What a trade it was," I hear them saying as I drive away.
http://www.nytimes.com/books/first/n/niederhoffer-speculator.html
http://www.nytimes.com/books/first/n/niederhoffer-speculator.html
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