Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week we have a special extra podcast. It's my
Speaker 1: interview with Viktor Niederhoffer. He is the author of Education
Speaker 1: of a Speculator and really is quite an accomplished and
Speaker 1: fascinating person. He has made and lost several fortunes, uh,
Speaker 1: primarily by using lots of leverage and by being on
Speaker 1: the other side of the trade from a number of
Speaker 1: black swans. And and if you think about taking the
Speaker 1: other side of the trade from not seem to leb Well,
Speaker 1: when you're right, you're gonna make money, but when you
Speaker 1: lose you're wrong, you're gonna lose a ton of money.
Speaker 1: And and that seemed to be what happened to Niederhoffer
Speaker 1: in the oh seven O eight o nine collapse. UM.
Speaker 1: He's had a number of uh astonishing setbacks that he's
Speaker 1: more or less recovered from. He still carries scars from
Speaker 1: from some of the losses, but by and large he
Speaker 1: is an accomplished and fascinating person, and I think people
Speaker 1: who are active traders can stand to learn a lot
Speaker 1: from his experiences. So, with no further ado, my conversation
Speaker 1: with Victor Niederhoffer. This is Masters in Business with Barry
Speaker 1: Ridholts on Bloomberg Radio. My special guest today is Victor Niederhoffer.
Speaker 1: He is known as one of the legendary traders on
Speaker 1: Wall Street. He studied statistics and economics at Harvard, got
Speaker 1: his PhD at the University of Chicago, briefly taught finance
Speaker 1: at Berkeley University before he began trading in ninety nine,
Speaker 1: when he turned fifty thousand dollars into twenty million in
Speaker 1: eighteen months. He was top trader for George Soros before
Speaker 1: starting on his own in the ninety nineties, launching his
Speaker 1: own fund. Then. He is the author of the classic
Speaker 1: investment text Education of a Speculator. Viktor Niederhoffer, Welcome to Bloomberg.
Speaker 1: Thank you very much, Barry. So. I am a fan
Speaker 1: of some of your writings and some of your work.
Speaker 1: I know of you through your reputation and your legends.
Speaker 1: You have a really interesting background. Your father was a
Speaker 1: police officer in New York City. Your mother was an
Speaker 1: English teacher. From that beginning, how did you find your
Speaker 1: way into finance? Well, what a policeman he was. He
Speaker 1: was in a class of nineteen thirty seven, which was
Speaker 1: the first time that civil service exams were given for policemen.
Speaker 1: Before that it was based upon m who you knew
Speaker 1: and your ethnicity. So in that in that class they had,
Speaker 1: which was in the middle of the depression, they had
Speaker 1: about fifty thousand applicants for two hundred and fifty jobs,
Speaker 1: and the two hundred and fifty jobs were decided based
Speaker 1: on a combination of physical i Q and intelligence i Q.
Speaker 1: So all the people in that class, including my father,
Speaker 1: were geniuses. Uh. My father, Um was a full letter
Speaker 1: man at Brooklyn College, and he had a pH d
Speaker 1: in a law degree, and he was a founder of
Speaker 1: John J. College and univer Versity, which at that time
Speaker 1: had fifteen students and now has eighteen thousand. And he
Speaker 1: was omniscient. So I always had a very uh intellectual
Speaker 1: background and a physical background from and in fact, let's
Speaker 1: flesh that out for listeners. You were the national amateur
Speaker 1: champion in squash. You're a highly regarded tennis player. You
Speaker 1: competed at the professional level in in racket squash, um
Speaker 1: surprising the number of pros by beating them, and on
Speaker 1: the intelligence side, no less than seemed to lab called
Speaker 1: you the most brilliant person he's ever met. So apparently
Speaker 1: the apple does not fall far from the tree. Well,
Speaker 1: m I wish I was half the man my father was.
Speaker 1: Um and uh, but you might as well since the
Speaker 1: one thing that I really have been very successful at
Speaker 1: was my rackets career. On my uh, there's a a
Speaker 1: very famous rackets player named Steve Keiley who was the
Speaker 1: number number one racquetball and paddle ball player in the
Speaker 1: in the world in the mid seventies, and he once
Speaker 1: described me as the best all amount, all around racket
Speaker 1: player in history. And I did win the us UM
Speaker 1: Amateur Championships five times and the North American Pro which
Speaker 1: at that time was the World Championships once so uh.
Speaker 1: And I was in the top ten in racquetball. So
Speaker 1: I did a lot of racket playing and but like
Speaker 1: everything else, success is fleeting. And last week I had
Speaker 1: a challenge match with your colleague Joe Weasenthal. And before it,
Speaker 1: I played a woman who was the who played with
Speaker 1: a paddle racket against my tennis racket. She uh m hm,
Speaker 1: so I had a big advantage. How did you do?
Speaker 1: She beat me twenty one to twelve. So a lot
Speaker 1: of a lot has changed. I had played on those
Speaker 1: same courts fifty about fifty eight years ago, and one
Speaker 1: the what was then called the the National paddle Bowl Championships,
Speaker 1: which they played with tennis racket in those days. And
Speaker 1: so in fifty five years I went from the top
Speaker 1: two and also ran in the markets like that. Also,
Speaker 1: let's begin with the quote of yours that I really like. Speculation,
Speaker 1: like most activities, is an art. Science attempts to answer
Speaker 1: the pivotal question of speculation invariably raised twice as many
Speaker 1: questions as they solve. That that quote raises at least
Speaker 1: two questions I find fascinating. What do you mean that
Speaker 1: speculation is an art and a science? Well, I I
Speaker 1: believe that in order to be successful speculation, you have
Speaker 1: to be very systematic, you have to do a lot
Speaker 1: of counting, and you have to have a scientific men.
Speaker 1: But also I I don't believe that algorithms and robot
Speaker 1: trading is the secret to success. I believe you have
Speaker 1: to have a higher framework. My higher framework involves a
Speaker 1: combination of ecology and statistics, biology, physics, and it's very
Speaker 1: important for anyone who wants to be successful to have
Speaker 1: a good foundation that overrides the ephemeral and the transitory
Speaker 1: aspects of the market. Why do you say that each
Speaker 1: inquiry raised twice as many questions as they answered that.
Speaker 1: That's a fascinating observation. Well, the beautiful aspect of speculation
Speaker 1: is that it's all encompassing. It covers um every economic, political, psychological,
Speaker 1: and biological facet of life. And in order to be
Speaker 1: good at it, you need to have a grounding and
Speaker 1: an appreciation of all these subjects, besides being systematic and
Speaker 1: knowing how to count. M hmm. It's a little more
Speaker 1: than knowing how to count, though, isn't it. You need
Speaker 1: to There are some people who do a lot of counting,
Speaker 1: and I I'm happy to say that, uh, I invented
Speaker 1: that what's perhaps the major, the major utilized tool and counting.
Speaker 1: I invented that thirty years ago, basically the idea that
Speaker 1: there are multivariate time series relations between markets that vary
Speaker 1: by day and time of the the day, and that
Speaker 1: has become the mainstay of of many of the many
Speaker 1: thousands of my competitors and followers who have used my
Speaker 1: program of variants of it, which I invented thirty years ago.
Speaker 1: You also invented thirty years ago, one of, if not
Speaker 1: the first software written as a trading program. You were
Speaker 1: decades ahead of the rest of Wall Street. Tell us
Speaker 1: how that computerized trading program that's about. That's an interesting story,
Speaker 1: and it's had a lot of unintended consequences. It was inevitable.
Speaker 1: It was going to happen eventually, of course, yes, But
Speaker 1: but you started before people were really think. I'll tell
Speaker 1: you how it started. It started and unique fashion that
Speaker 1: probably has never happened before. When I got into business,
Speaker 1: I started a business in being a merger broker. We're
Speaker 1: called finders in those days, an investment banker. I was
Speaker 1: not an investment banker. That people used to try to
Speaker 1: criticize me and say that I sold businesses the way
Speaker 1: Colgate sold toothpaste, which I took as a great compliment.
Speaker 1: In one of those aspects, I was visiting Tandy Cooperation
Speaker 1: and they were an owner of radio shock if Memory serves.
Speaker 1: At that time in their catalog they had first developed
Speaker 1: and offered for sale a radio Shock TRS a D,
Speaker 1: the first user programmable computer. More or less correct, I
Speaker 1: was one of the first to buy that computer, and
Speaker 1: I bought one from my younger brother, Royn eater Offer,
Speaker 1: and he and I. He was about ten at the time.
Speaker 1: He subsequently developed a game business where he had about
Speaker 1: seventy of his colleagues in elementary in high school working
Speaker 1: for him and I. Then UM used that radio shack
Speaker 1: computer which had thirty about fifteen thousand UM bits of
Speaker 1: memory available to program a systematic multivariate time series program
Speaker 1: with a young assistant of mine named Susan, who was
Speaker 1: so good at programming and so efficient and also very
Speaker 1: good at racquetball that ultimately, UM, we started living together,
Speaker 1: and it's about we're we've been married for thirty or
Speaker 1: forty years and and been with each other for about
Speaker 1: fifty years forty five years. So you grab await from
Speaker 1: the University of Chicago, which is known as the efficient
Speaker 1: market hypothesis capital of the universe, and yet you UH
Speaker 1: start pushing back against the m H immediately saying, now,
Speaker 1: I think there are patterns visible and market trading and
Speaker 1: short term there are ways to beat the market and
Speaker 1: and earn UM identify UH. Short term, there are ways
Speaker 1: to identify opportunities that are consistent, repeatable. How much pushback
Speaker 1: did you get from the E m H crowd at Chicago, well,
Speaker 1: we were all a bunch of ignoramuses in those days,
Speaker 1: and they had some crutches and old sauce that they
Speaker 1: like to use based upon um distributions with infinite variances.
Speaker 1: They called them Paradouh distributions, and there their acts. Their
Speaker 1: bias at that time was that everything was random, and
Speaker 1: that all um known information was immediately in captain the market,
Speaker 1: and there was no way to make a profit. And
Speaker 1: I was I've always loved to go into the stacks
Speaker 1: of libraries, and fortunately the Harvard Business Library had one
Speaker 1: of the best libraries in the world. And I would
Speaker 1: add I've been fortunate to be associated in my three
Speaker 1: stints at education at Harvard, Chicago, and Berkeley. Each one
Speaker 1: had a great library, which I used to the foremost.
Speaker 1: But I used to look at the Harvard had something
Speaker 1: in those days which no one else had, which was
Speaker 1: the Francis Emery Fitch Sheets, which had the record of
Speaker 1: every transaction, which in those days were about twenty thousand
Speaker 1: transactions a day on the New York Stock Exchange and
Speaker 1: the American Stock Exchange. And I looked at those transactions
Speaker 1: and found that there was a tendency to reversal at
Speaker 1: the microscopic level, and to continuation at the macroscopic level. Now,
Speaker 1: in other words, ongoing trends tend to continue, but there
Speaker 1: are short term reversals against the dominant trends. That's what
Speaker 1: I noticed. Of course, the markets are ever changing, and
Speaker 1: I wouldn't say that's true today in general. But I
Speaker 1: then looked at a in one of my florays in
Speaker 1: the evening I've always been like to read late in
Speaker 1: the night. Harvard had bound copies of all magazines, all
Speaker 1: scientific journals, and one of them was called the Monthly
Speaker 1: Weather Review, and in a like a nineteen sixteen article,
Speaker 1: they had an article about runs and sequences, turning points
Speaker 1: in weather. And it occurred to me that it would
Speaker 1: be useful to look at runs and classified by the
Speaker 1: length of run in the market. So I started. While
Speaker 1: I was competing on the squash and tennis team, I
Speaker 1: would take the ticker tapes, the Francis Emery Fitch sheets,
Speaker 1: and i'd stought owning reversals and continuations, and I found
Speaker 1: that it was about nine times as likely for there
Speaker 1: to be a short term reversal as a continuation. And
Speaker 1: I wrote an article on this and UM. It was
Speaker 1: published in the Journal of the American Statistical Association, was
Speaker 1: the lead article, and I applied some what they called
Speaker 1: some Markov processes to it. So when I went to Chicago,
Speaker 1: I had this under my belt, and it created uh,
Speaker 1: tremendous negative feedback with hysteria and tremendous hatred from the
Speaker 1: random walkers UM, who then were following the idea that
Speaker 1: everything was efficient, and they manifested this hatred in many ways,
Speaker 1: so cognitive dissonance its head. Rather than accept the data,
Speaker 1: they doubled down on the theory because you also had
Speaker 1: data showing that there was a consistent pattern between what
Speaker 1: took place on a Monday and what took place on
Speaker 1: a Friday. And even though there was a lot of data,
Speaker 1: they seem to have a hard time with that. Well
Speaker 1: that's that's another story. But as as an example, the
Speaker 1: Business school was it was situated in a place called
Speaker 1: Haskell Hall at that time, and one time I was
Speaker 1: coming down from the third floor and and speech echoes
Speaker 1: up and four or five of the random walker is,
Speaker 1: including two of subsequently one Noble prizes, uh what talking
Speaker 1: And they were studying us some computer output on stock
Speaker 1: splits and I heard one of them say, Wow, you know,
Speaker 1: we're really in trouble. If we find some regularities here,
Speaker 1: now this, this could defeat our ideas. And I memorialized
Speaker 1: that conversation and I did not neglect UM two UM
Speaker 1: HM to elicit it and some of my presentations. You
Speaker 1: put together quite a track record. You had a twenty
Speaker 1: year run up of or better annual returns. How on
Speaker 1: earth do you put together a track record like that. Well,
Speaker 1: it was with a small amounts of of money, and
Speaker 1: it was certainly unsustainable. But during that period, two or
Speaker 1: three times I won the award as the best performing
Speaker 1: UM managed to count. These were commodity futures commodity futures traders.
Speaker 1: And I got another award in nine UM right before
Speaker 1: the debacco that I believe is on the tip of
Speaker 1: your tongue, the tie Bot crisis and uh what that
Speaker 1: did to currency and commodity prices. I had the model
Speaker 1: of George Soros, who I was very intimate with at
Speaker 1: that time. We most have spoken thirty fifty times a day,
Speaker 1: and he always said that he made more money from
Speaker 1: things he didn't know about than things he did know about.
Speaker 1: And I unfortunately ran with that idea, And I didn't
Speaker 1: know anything about emerging markets, but I sent my before
Speaker 1: mentioned friend Hobo Kiely around the world to visit every
Speaker 1: emerging market, and he came back um with the idea
Speaker 1: that India look good, but they charged you a half
Speaker 1: a percent of one percent on every transaction, and they
Speaker 1: had some hi um barriers to to entry. But he
Speaker 1: really favored Thailand because on his previous visit the brothels
Speaker 1: were much and much worse shape, and they had really
Speaker 1: cleaned up the brothel act, and he felt that that
Speaker 1: was his economic indicator. Yeah, and the length of the
Speaker 1: cigarette stubbs. If people only smoked half a cigarette and
Speaker 1: threw away you had you had referenced that it meant
Speaker 1: they felt confident and had lots of discretionary money. He
Speaker 1: had a number of of indirect indicators like that, um.
Speaker 1: But in any case, they promised low commissions, and the
Speaker 1: brothels were were very clean and they didn't use strong
Speaker 1: arm tactics against the the visitors the way they did
Speaker 1: on his previous visit. He didn't tell me that percent
Speaker 1: of the buildings had stopped construction construction and at the
Speaker 1: fourth floor, but in any case, I it was the
Speaker 1: worst performing market. It was down about at that time
Speaker 1: when every other market was up ten percent. And I
Speaker 1: had had done some work that um, the worst the
Speaker 1: worst performing groups in the New York Stock Exchange during
Speaker 1: the next year always were the best performing and the
Speaker 1: subsequent subsequent years and went from the worst to the
Speaker 1: to the best. And can you extrapolate New York stock
Speaker 1: groups to international? Regrettably not, but I I did. I
Speaker 1: did extrapolate it. It seemed like I had everything. I
Speaker 1: had the cigarettes, the brothels, and the commissions. And the
Speaker 1: price is the price of a coke was something like
Speaker 1: two cents uh there at that that time. And so
Speaker 1: I got in and uh didn't work out. Oh, it
Speaker 1: really used up a lot of my capital. I my
Speaker 1: liquidity was tremendously um reduced, and I was not able.
Speaker 1: Um two. Well, I'll tell you something that's very important.
Speaker 1: You were talking about my family before. My grandfather once
Speaker 1: told me that the worst thing in the market is
Speaker 1: to get in over your head. He was a speculator,
Speaker 1: traded in the twenties right up until the crash. He
Speaker 1: had the pleasure of trading with Jesse Livermore. Really and
Speaker 1: in fact, um, so your grandfather traded with Jesse Livermore.
Speaker 1: You traded with George Soros. That's quite a family lineage, yes, UM, somewhat,
Speaker 1: as they would say at a sepcoic in UM both
Speaker 1: both cases. In fact, my grandfather took lessons from Scott
Speaker 1: Choplin piano lessons and yeah, and he knew a lot
Speaker 1: of the unpublished rags. And he was the treasurer of
Speaker 1: Irving Berlin's public shring studio in nineteen oh seven, and
Speaker 1: he had the unfortunate, uh experience of being liquidated during
Speaker 1: the nine seven crash, which was very similar to the
Speaker 1: two thousand eight crash in the and then yeah, he anyway,
Speaker 1: he always told me never getting over your head. I
Speaker 1: was in over my head, uh, with taught with Thailand
Speaker 1: and with option trading. You dropped the phrase epicyclical. And
Speaker 1: I want to reference that because in genetics there's a
Speaker 1: concept of and I'm getting the word wrong, epigenomics or
Speaker 1: the possibility that experiences can be transferred from one generation
Speaker 1: to the next. Is that what your references No, I'm
Speaker 1: not UM talking about the selfish gene and the fact
Speaker 1: that um or activities are designed to maximize the fitness
Speaker 1: of of our and replicability and survivorship, UH, prevalence of genes.
Speaker 1: I'm talking in the old days. UM. The astronomy is
Speaker 1: used to try to calculate the motion of the big
Speaker 1: orbits of the planets, and they had come up with
Speaker 1: Ptolemy came up with about thirty different equations to finally
Speaker 1: to calculate how the planets moved before Newton the retrogrades,
Speaker 1: thinking the Earth was the center of the Solar system
Speaker 1: instead of the Sun. Is that is that what you're referencing? Well,
Speaker 1: then Copernicus and uh and Tico Debra came up with
Speaker 1: various equations and they called those equations epicickly of course,
Speaker 1: so they were overdetermined and they had too many, too
Speaker 1: many equations for the variables that they were trying too much.
Speaker 1: By the way, that's probably the biggest mistake that the
Speaker 1: systematic and the amateur trade and makes in the market.
Speaker 1: Too too much complexity with simplicity will do They call
Speaker 1: it multiple comparisons. It's UM implicitly to have UM numerous
Speaker 1: hypotheses that they're testing what that they know about, and
Speaker 1: then they try to fit that to a very small,
Speaker 1: um small number of observations. I I read that you're
Speaker 1: a great believer in UM indexing. Well, for the average person,
Speaker 1: I think there's also a place for for a tactical
Speaker 1: there is a place for active management. But the average
Speaker 1: mom and pop investor, for the most part, can't pick stocks,
Speaker 1: can't time markets, can't hire people to pick stocks or
Speaker 1: time markets, and so I think for them, Jack Bogel
Speaker 1: had it right. I think you have it right, and
Speaker 1: Jack had it right. By the way, he's a squash
Speaker 1: player that I've had some contact with. Any good Is
Speaker 1: he any good? Yeah? I think he was. He was
Speaker 1: quite a good player. I s eighties seven something like that.
Speaker 1: He was just his birthday, not to and and the
Speaker 1: Sage of Nebraska as a racquetball player. Larren Buffett, Yes,
Speaker 1: I had no idea. Let's talk a little bit about
Speaker 1: Soros before we start talking about your funds. You were
Speaker 1: trading fixed income and currencies for Soros for for a
Speaker 1: long time from eight two to What was that like.
Speaker 1: He has a reputation of really micromanaging every trade. What
Speaker 1: was it like to to be an active trader under Soros? M? Well,
Speaker 1: he taught me M quite a few things. Um. The
Speaker 1: most important was that you should always use two cans
Speaker 1: of tennis balls when you were when you were playing.
Speaker 1: Um that because if you have one can, which used
Speaker 1: to be three bulls, then you spend half your time
Speaker 1: chasing balls, whereas if you have two cans, then of
Speaker 1: the time can be playing and you can let the bulls.
Speaker 1: Is there a metaphor there for life, for trading or
Speaker 1: is it just about tennis. No, there's a metaphor for
Speaker 1: for life. You have to look at the big picture
Speaker 1: and don't don't worry about the ephemera. And of course,
Speaker 1: in my day I I played tennis every day with
Speaker 1: my father and we would shovel snow off the courts
Speaker 1: in Coney Island to play. And to have one new
Speaker 1: tennis ball was considered uh a luxury, tremendous, tremendous luxury.
Speaker 1: And the idea that you could actually have spend money
Speaker 1: for two cans and with alacrity was astonishing to me.
Speaker 1: And what else did you learn from Soros besides always
Speaker 1: bring an extra can of tennis balls to the court. Uh,
Speaker 1: No one in the world has a better instinct for
Speaker 1: survival than he does. And both literally literally having escaped
Speaker 1: the Nazis and figuratively as a trader exactly exactly. And
Speaker 1: he I remember, as mentioned, we spoke fifty sixty times
Speaker 1: a day continuously for about ten and twelve fifteen years.
Speaker 1: And remember during the October seven crash on Thursday, October
Speaker 1: uh he sold all of his stocks, just liquidated them
Speaker 1: at the open he made he made he made so
Speaker 1: many traders on the floor of the Mercantile Exchange multi
Speaker 1: millionaires with that trade. But it occurred to him that
Speaker 1: he could um face destruction, and he did what he
Speaker 1: had to do. He liquidated his entire position, took a
Speaker 1: huge loss, thinking that survival was more important than anything else.
Speaker 1: And I believe he did the same thing with Mr
Speaker 1: druck A Meyer in the two thousand period when um
Speaker 1: drug A Miller attended a conference in which it was
Speaker 1: mentioned that there's no such thing as a proper valuation
Speaker 1: forum internet stocks for technology stocks, and that you know
Speaker 1: it's based upon it should be based upon views and potential.
Speaker 1: And then he he went ho hog and bought a
Speaker 1: tremendous percentage of his fund into the the companies with
Speaker 1: multibillion dollar market values and no earnings and little sales
Speaker 1: at that time. And I believe that Soros had the
Speaker 1: same reaction that he did in nine, just liquidated the
Speaker 1: entire position. Thought that survival was at stake, and I
Speaker 1: believe I believe that. I believe that was the key
Speaker 1: UM in this year. The key UM, the key reason
Speaker 1: that their partnership ended at that time, is the key
Speaker 1: takeaway you got from Soros. The importance of survival in
Speaker 1: the investment markets is always always lived to fight another day.
Speaker 1: Is that the most important lesson he teaches. Well. One
Speaker 1: of my mentors, Irving Riddell, always um said the market
Speaker 1: will always be there. Then the next day. I should
Speaker 1: have known that. My grandfather told me don't get in
Speaker 1: over your head UM, and from my rackets career, I
Speaker 1: should have known not to play the other person's game.
Speaker 1: I should have should have learned that from sorrows escaping
Speaker 1: from Hungary UM during World War Two. So after sorrows,
Speaker 1: you launch your own hedge funds. Tell us what that
Speaker 1: process was like, who your clients, how the fund do? UM? Well, again,
Speaker 1: I I had some as my wife likes to say
Speaker 1: in her m HM curriculum Vita. She's the director of
Speaker 1: some of UM, the firms related to John mc key's
Speaker 1: Whole Whole Foods UM operation and conscious capitalism as as
Speaker 1: she likes to say. And she's been the director of
Speaker 1: on the board of every Montessori school that we've sent
Speaker 1: to our kids too that she's been associated. She's and
Speaker 1: some of the years we were the best performing fund,
Speaker 1: and in some of the years we were the worst
Speaker 1: performing fund. And then UM, when I had the tobacco
Speaker 1: in seven, she offered to resign from all her boards,
Speaker 1: but they didn't. They didn't accept her resignation because she
Speaker 1: was too good at what she did. So you launch
Speaker 1: your funds, who are your clients and and who's investing
Speaker 1: with you? Well, I had a number I had a
Speaker 1: lot of people who mistakenly thought that because I was
Speaker 1: so good in racket sports, and because I had a
Speaker 1: very good academic reputation, that I might be good at
Speaker 1: UM investing. And I did have a good track record
Speaker 1: for many years. It was in nineteen as I mentioned,
Speaker 1: in nineteen nineties, the twenty years prior to seven, you
Speaker 1: were compounding at thirty a year. Well, again, that's a
Speaker 1: phenomenal run. It's it's a lot of it's a lot easier.
Speaker 1: As as you may know, when I started out in business,
Speaker 1: I I knew nothing and I took fifty thousand into
Speaker 1: twenty million in about six months. It's got to be
Speaker 1: more than just dumb luck. It was very wrongful, very
Speaker 1: meaning I did. I did a lot of um, a
Speaker 1: lot of bad things. Was very but you were trading much,
Speaker 1: very very much over my head. And it was just
Speaker 1: fortunate that during that period, ah, I had a foundation
Speaker 1: where I believe that, uh, sort of the way a
Speaker 1: lot of people do now, that the world was coming
Speaker 1: to an end, and that gold was going to go
Speaker 1: from two hundred to a thousand, which it did, and
Speaker 1: that the yields on bonds we're gonna go from in
Speaker 1: those days six percent to twelve percent, and during that
Speaker 1: six months it did. But so you were right. You
Speaker 1: had some big perspective views and they turned out to
Speaker 1: be correct. Fortunately. I also had learned a little something
Speaker 1: from my forays into gambling and racket sports. And most
Speaker 1: people make the mistake of putting a limit on how
Speaker 1: much they're going um to lose, and they tell the
Speaker 1: they tell the partner before they start gambling. You know,
Speaker 1: dear him, if I lose more of them a thousand dollars,
Speaker 1: I'm out of here regardless, And don't no matter what
Speaker 1: I say, don't UM. Don't listen to me. UM put
Speaker 1: put the ear plugs in your ears the way UM
Speaker 1: ulysses Um shipmates did on his travels before the Skilla
Speaker 1: and Charybdis and the sirens. And I, fortunately UM had
Speaker 1: a m had a remembrance of those. It sounded, it
Speaker 1: sounded sensible. So when I got up to twenty million,
Speaker 1: I told all of my UH colleagues, including the future
Speaker 1: Mrs Niederhoffer, I said, if I ever get down to
Speaker 1: ten million, if I lose more than half, liquidate me
Speaker 1: regardless of anything I say, don't listen to me, because
Speaker 1: I'll probably be begging you not not to get out.
Speaker 1: At that time, well, I I had there was one
Speaker 1: player in the New York City area who could give
Speaker 1: me a game in racquetball. His name was Ruben Gonzalez
Speaker 1: and he he still is at sixty years old. He's
Speaker 1: in the top ten and racket ball, and he was
Speaker 1: the pro in the Staten Island Court Club. I went
Speaker 1: to Staten Island one day during the morning and I UM.
Speaker 1: We played UM two two games and it was one wall.
Speaker 1: I made a call to the office and they said,
Speaker 1: you just lost half your you just lost three quarters
Speaker 1: of your steak and you're out of the mark. I said,
Speaker 1: what are you crazy? And and what happened by the
Speaker 1: time by the time I got out and lost another hand?
Speaker 1: It was the first they started looking within a ten.
Speaker 1: And yeah, and in those days, to only lose fift
Speaker 1: was pretty pretty good. And Ruben Uh, about twenty years
Speaker 1: later said to me, no vic, I remember that game,
Speaker 1: and when when when we came back for the third game,
Speaker 1: you seem like like a different person and you weren't. Yeah,
Speaker 1: you are so uh, you seem so preoccupied, uh with
Speaker 1: other things that it was easy, too easy to beat you.
Speaker 1: That so losing three quarters of your fortune affects the
Speaker 1: irracket game. Is that the takeaway there? Anything, anything affects
Speaker 1: your market game and your racket game. Everybody loves a
Speaker 1: comeback story. Tell us how you managed to after going
Speaker 1: through that debacle. How did you manage to rebuild um
Speaker 1: your trading positions? How do you find the confidence to say, yes,
Speaker 1: I could do this. This was just an aberration and
Speaker 1: I'm going to overcome this. The story is a little
Speaker 1: a bit more complex than than that. It is one
Speaker 1: of one of the aspects of of life is that
Speaker 1: sometimes a tremendous quantum event um can which is seemingly
Speaker 1: very good um, can have negative consequences, and vice vice versa.
Speaker 1: From adversity often comes a great success and from racket
Speaker 1: spot it's almost every good racket player will will tell
Speaker 1: you that the most important lessons and the most the
Speaker 1: greatest improvements in their life came after tremendous defeats um
Speaker 1: and after my various debaccos, which, as you know, I've
Speaker 1: been trading for fifty fifty five years, so I've had
Speaker 1: some great successes. And in fact, you said that you had.
Speaker 1: I want to get the numbers right because I want
Speaker 1: to specifically reference some of these successes. You said, when
Speaker 1: we look at the number of trades you have that
Speaker 1: have been successful, your hundreds of standard deviations away from
Speaker 1: the norm, you trade it over too million contracts with
Speaker 1: the average profit of over seventy dollars per contract. That's
Speaker 1: about a hundred and fifty million dollars in games just
Speaker 1: from from those trades. In other words, this is not
Speaker 1: purely random. There is obviously some skill to that much
Speaker 1: successful trade. All right, now, I have to talk about
Speaker 1: a great man. Man I loved His name was James
Speaker 1: Lourie and without him, I wouldn't be in business. He
Speaker 1: gave me my first job and he UM. He was
Speaker 1: the founder of the first major statistical study of returns
Speaker 1: in common stocks. They called it CHRISPS the sender for
Speaker 1: research and security prices. That's a huge database these days.
Speaker 1: Not only is it the huge database, but along with Dempson,
Speaker 1: moh and Stunting, it's UM the most important thing for
Speaker 1: UM the investor to comprehend and hopefully to read ah
Speaker 1: in any In any case, he helped me get through
Speaker 1: my thesis with all the detractors and haters that were
Speaker 1: always around trying to um do me in. Yeah, they
Speaker 1: they I was not a favorite son there, but he
Speaker 1: steered me through. It helped me keep my scholarship. UM
Speaker 1: helped me defend my thesis. He was my thesis advisor,
Speaker 1: got me my first job at Merrill Lynch, my first
Speaker 1: clients president of Sunbeam, and his daughter Um was He
Speaker 1: became a traitor on the Chicago Options Exchange and then
Speaker 1: she worked for me for fifteen years. Name is Erica
Speaker 1: and Jim once came to my office whenever he came
Speaker 1: to New York, and he was on ten different boards
Speaker 1: in New York. He would stop by and he said, Victor,
Speaker 1: if you had told me twenty years ago that my
Speaker 1: daughter would be working for you with all your regularities
Speaker 1: and UM predictive patterns, I went have believed it. And that,
Speaker 1: to me is the greatest compliment that I ever received,
Speaker 1: that he was able to say that his daughter would
Speaker 1: UM find a proper home in my multivariate time series
Speaker 1: programs and analyzes. Now, some of those statistics again are
Speaker 1: again not very meaning focus. They were it's a lot
Speaker 1: easier to make money when you're trading a few contracts
Speaker 1: UM then when you're trading a lot. But my experience
Speaker 1: for soros Um was not altogether positive in the sense
Speaker 1: that he he liked UM not only to have me
Speaker 1: trade for him, but he would trade parry passu. He
Speaker 1: liked to call it for his fund on the things
Speaker 1: I was trading with, plus parry pessu for his own accounts.
Speaker 1: So in other words, he would piggyback your trades. So
Speaker 1: there would be when I'd make a trade, and and
Speaker 1: then it was also my own trades. So if I
Speaker 1: made a trade UM, the quid pro quol was I'd
Speaker 1: make the same trade for him give him the same
Speaker 1: prices and for the fund and for his own account.
Speaker 1: So there were three levels of trades. Might my trades
Speaker 1: might have been in those days for a stated um
Speaker 1: market value of thirty million, but for his fund would
Speaker 1: be for two hundred or three hundred million, and UH
Speaker 1: comparable for for his own accounts. So when I traded UH,
Speaker 1: if I traded twenty contracts for myself, did be two
Speaker 1: hundred before d for um the Parry Patsu boys. So
Speaker 1: it got to be so I was always when I
Speaker 1: had a position, I was always frightened because how was
Speaker 1: I going to get out of these this position? Because
Speaker 1: when I did in those days a fifty contract um
Speaker 1: the position you know, five million market value in in
Speaker 1: bonds or ten million in currencies was was big. I
Speaker 1: had to two hundred, five hundred, sometimes a billion that
Speaker 1: I had to go in front of me. So I
Speaker 1: became very very much. That has to affect your execution.
Speaker 1: It made me very short term oriented. When I had
Speaker 1: a profit, I was very quick to take it and
Speaker 1: I was very quick to get in when and you
Speaker 1: can't get into to a big position like that unless
Speaker 1: it's going the opposite way. So when the market went down,
Speaker 1: i'd buy it. When I went up and I became
Speaker 1: I thought the Federal Reserve should have paid me a
Speaker 1: endowment because I maintained equilibrium and homeostasis in all the markets.
Speaker 1: If it ever, you're creating liquidity where there was none.
Speaker 1: I created equilibrium. I prevented moves away from the the normal,
Speaker 1: the normal workings and the balance the harmony of the markets.
Speaker 1: The markets are always in harmon and if one gets out,
Speaker 1: then the Federal Reserve would or the central banks would
Speaker 1: try to um reduce the disharmony. But instead of they're
Speaker 1: having to work, I was doing it for them, and
Speaker 1: very frequently UM when I traded, the central banks of
Speaker 1: Japan and and of Germany would be trading it exactly
Speaker 1: the same time. And not not only because they were
Speaker 1: trying to equilibrate, but also because in those days they
Speaker 1: had squawk boxes, and the squawks boxes would immediately um
Speaker 1: lead to they're doing exactly the same thing. So I
Speaker 1: became very um, very much um A a dis dis
Speaker 1: equilibrium UM homeostatic um playing trader, and that is no good.
Speaker 1: So let's talk a little bit about the comeback, which
Speaker 1: I think people are gonna find I'm going into that comeback.
Speaker 1: I realized, my brother, it's a lot smarter than I am,
Speaker 1: a lot more successful than I am. He's now the
Speaker 1: chair of the New York City Opera, which she brought
Speaker 1: out of bankruptcy. When he plays twenty two different instruments.
Speaker 1: He's brilliant, very fine guy like my father. But he
Speaker 1: once said to me, Now, look suppose you were in
Speaker 1: a situation where whenever you made a trade, UM, you
Speaker 1: told it to someone else and he traded a hundred
Speaker 1: times as much as you, and UM, for that UM,
Speaker 1: you received ten percent of the profits. Um. What what
Speaker 1: would that do to your executions? And would you make
Speaker 1: or lose money? And I said no, I went, I certainly,
Speaker 1: if I had to trade a thousand contracts rather than fifty,
Speaker 1: I certainly the give up the vague would be bit
Speaker 1: as spread would certainly reduce my profits to zero. And
Speaker 1: he says, so why are you doing it? And at
Speaker 1: that time, I fortuitously realized that I was doing the
Speaker 1: wrong thing. With sorrows gave him. I said, look, we
Speaker 1: gotta stop this. We'll still still play tennis and chest together,
Speaker 1: and I love you. But that said unfortunately, and his
Speaker 1: first book UM before are before he seven relations with me,
Speaker 1: He wrote, I was the only guy who ever gave
Speaker 1: him back his money and stopped UM, stopped trading from
Speaker 1: while I was still way ahead, so that that that
Speaker 1: was true. But in any case, after and after two
Speaker 1: thousand and seven, I realized that it was dysfunctional, harmful
Speaker 1: for me. Two have a UM, A fund that I
Speaker 1: do much better trading for myself. And that's the only
Speaker 1: thing I do. I trade for myself. I have a
Speaker 1: bunch of very loyal and competent assistance I have. I
Speaker 1: have no I have no fund, and I have no
Speaker 1: desire to have a fund. I have no UM. But
Speaker 1: post seven, you had quite a staff of statisticians and
Speaker 1: mathematicians working with you trying to pick something up. Well,
Speaker 1: I'm talking about after two thousand seven. Okay, Now, from
Speaker 1: seven to two thousand seven, it was a roller coaster
Speaker 1: of it was. It was a pretty good UM. It
Speaker 1: was a pretty good run. As I say twice during
Speaker 1: that period, I was voted the best trader in the world.
Speaker 1: I got trophies, and you managed to rebuild your fortune
Speaker 1: quite You recovered most of, if not all, of your
Speaker 1: losses from if I'm remembering the story correctly. You know,
Speaker 1: again it was from a very small, small base, uh,
Speaker 1: nothing to be ovally proud of. But in any case,
Speaker 1: I did have a good run uh to two thousand seven,
Speaker 1: but I made some terrible mistakes there also made them
Speaker 1: very so, very bad errors. So let's talk about those
Speaker 1: eras briefly. If I could sum those up, it's essentially
Speaker 1: you embraced risk and used a lot of leverage, and
Speaker 1: you're at that point at the mercy of your brokers.
Speaker 1: Even if your trades, some of your trades that didn't
Speaker 1: work out, had you had the ability to hold onto
Speaker 1: them for another six months, would have been how about
Speaker 1: another six hours? Six hours? So what do you do?
Speaker 1: You had a very um, a very good summary. I'm
Speaker 1: I'm very impressed that you were able to encompass the
Speaker 1: the gestalt, the gist of of my downfall. However, downfall
Speaker 1: and recovery, however, I think you gotta mention with the
Speaker 1: down in the up You can't ignore them. However, there
Speaker 1: are some grave uh technicalities involved in my downfall, and
Speaker 1: the technicalities have to do with the fact of what
Speaker 1: is called flexionic activity. I'm actually searching for that phrase
Speaker 1: right now. Yeah, look, at Janine Woodell. Anyway, a flexion
Speaker 1: is someone who has his hand in many different areas
Speaker 1: in the government, as someone who's a consultant, who's a politician,
Speaker 1: who's on the board of he's on the board of
Speaker 1: various um and and geo's. It's a professor at a university,
Speaker 1: he's a he's a writer for the big publications. And
Speaker 1: there are a lot of them, a former a former
Speaker 1: executive at a big military firm or a big lobbyists.
Speaker 1: So the flexions are people that you can't they're very flexible.
Speaker 1: You can't really pin what they're position is. And anyway,
Speaker 1: there were flexions in the markets that I traded, and
Speaker 1: these flexions were on the margin committees and the market
Speaker 1: making committee, and the trades that I put on they
Speaker 1: were regrettably only two or three market makers. So you
Speaker 1: really don't have a lot of flexible. The normal bid
Speaker 1: spread is fifty to the kinds of things I traded.
Speaker 1: Might be UM bid it a half and offered it seven.
Speaker 1: Doesn't sound like much, and if you do it in
Speaker 1: terms of volatility, it might be like percent qualitity versus
Speaker 1: twenty nine percent. But I meanwhile, it's a bit ass
Speaker 1: spread so that if you try to get out of
Speaker 1: these positions at any time, and often I had a
Speaker 1: position with market value of a hundred million or more,
Speaker 1: the immediately lose fifty million dollars. Now, when the market
Speaker 1: goes against you, the people on this market making um
Speaker 1: uh pit we're also on the margin committee, so they
Speaker 1: would raise the margins, which happened to me by um
Speaker 1: fifty for front by a fifty percent to by fifty to.
Speaker 1: Whenever the market had a had a decline of half
Speaker 1: a percent or more, they raised the margin. So that
Speaker 1: and then of course when uh they also set the
Speaker 1: prices and often um the market would stay the same,
Speaker 1: but the underlying market would stay the same, but the
Speaker 1: prices of my options, which I was short, would often
Speaker 1: go up by My investors were very upset because the
Speaker 1: market hadn't moved. And as they'd say, you know, when
Speaker 1: the market goes down, you know you make five or
Speaker 1: ten percent. Uh Ma, market goes up, you make five
Speaker 1: or ten percent. One market um goes down, you lose
Speaker 1: twenty in a daycal and how could that be happening? Well? Um,
Speaker 1: what was I I couldn't get out of the positions
Speaker 1: because there was a fifty normal bit as spread if
Speaker 1: you ever tried to liquidate, it would be a hundred
Speaker 1: or two let alone. What would happen if if you
Speaker 1: had to liquidate during a panic, and let's put some
Speaker 1: flesh on the bones as to the margin you with
Speaker 1: futures trading at the time, you would put up one
Speaker 1: percent and then they'd raise that one percent mid trade
Speaker 1: down the road when we hit some turmoil to two
Speaker 1: or three or four percent. The quadruple, Well, you have
Speaker 1: to put up that qualitatively. What what you say is true.
Speaker 1: But between the unfortunate um and very reasonable uh dissatisfaction
Speaker 1: of my investors who uh well withdrawing funds, the tremendous
Speaker 1: um bit ass spreads, the um, the raising of margins,
Speaker 1: the setting of prices UH that were totally out of
Speaker 1: line with what what they should have been in terms
Speaker 1: of normal volatility and pricing, plus about ten other mistakes
Speaker 1: I made. I was able to shoot myself in the foot,
Speaker 1: did myself, and and I was I was forced to
Speaker 1: um and to say nothing of the clearing firms who
Speaker 1: were very upset by the potential for great losses. Fortunately,
Speaker 1: in the case of two thousand seven seven, there was
Speaker 1: not any my clearing firm made a fortune from my trades,
Speaker 1: and I was able. I ended up and the whole.
Speaker 1: But I, of course, I had made hundreds of millions beforehand,
Speaker 1: and you know, in in total um, in total um,
Speaker 1: it was profitable. But so it was. It was a
Speaker 1: tragedy and a tobacco But what I'm getting to was
Speaker 1: that was it no more, no more bit spreads, no more,
Speaker 1: no more being forced to liquidate. And in a panic
Speaker 1: where a hundred million dollars of positions I had in
Speaker 1: order to get out would of course me four hundred million.
Speaker 1: I don't have a hedge fund, and I'll never I'll
Speaker 1: never go down that road again. Let me say one thing.
Speaker 1: That's the real story about why I lost, not what
Speaker 1: nasty to tell of says, or not what the spreads
Speaker 1: spreads and the and the flexions. We have been speaking
Speaker 1: with Victor Niederhoffer. George Soros is trader of author of
Speaker 1: Education of a Speculator. You can check out my daily
Speaker 1: column on Bloomberg View dot com or follow me on
Speaker 1: Twitter at rid Halts. I'm Barry Ridolts. You're listening to
Speaker 1: Masters in Business on Bloomberg Radio.