Last Updated on December 11, 2021 by Oddmund Groette
I regard Victor Niederhoffer’s The Education Of A Speculator as a must-read for any aspiring quant. Why? Because it explains the foundation and principles for successful speculation.
In this article, I give a brief review and summary of the book. In the end, I give you my main lessons and takeaways from the book.
I have a special crush on Nierhoffer because The Education Of A Speculator was the reason for my interest in quantifying my strategies with strict rules for buy and sell signals. I never looked back when I learned this invaluable tool. Because Niederhoffer was one of the first traders and investors to use statistics and the scientific method to speculate in the financial markets, I have high regard for Niederhoffer.
Who is Victor Niederhoffer?
Niederhoffer was born in 1943 in Brooklyn and learned from an early age how to speculate via board games. He later went on to academia at the University of Chicago where he wrote his dissertation and PhD on anomalies in the stock market.
He left academia in the early 70s to focus full time on making money on anomalies in financial assets.
He went on to have a very successful career until he “blew-up” in 1997 after a margin call during the Asian-crisis. Prior to that, he was even ranked as the top hedge fund manager in the world.
After selling most of his assets and mortgaging his estate, Niederhoffer tried again by setting up a new hedge fund for outside clients. He performed very well (again) and received several awards for spectacular performance until he yet again “blew -up” with a 75% loss in 2007.
One of the harshest critics of Niederhoffer has been Nassim Taleb, the successful author. If you are interested in reading more about these two gentlemen, I recommend this link. They have opposing views when it comes to trading and speculating.
Niderhoffer is eccentric. One of my friends worked as a summer intern for Niederhoffer many years ago, and he has shared some interesting stories, not only about Niederhoffer but also some of his trader colleagues.
Today, in 2021, Niederhoffer is still speculating full-time (at 77 years of age), but only for his own account.
Victor Niederhoffer trading strategies:
Niederhoffer’s motto is test, test, and test more. This was rather unheard of in the 70s, while today quants are everywhere on Wall Street.
Data is available for anything you can imagine. Niederhoffer wanted to check anything and turn it into trading strategies, like for example:
- What happens on a FED day?
- What happens on option expiration days?
- What happens if January is positive?
Most of his time spent in the office was (is) spent testing hypotheses.
Niederhoffer has taught many good money managers that later when on to have success on their own, like for example, his own brother, Roy.
Jim Simons has never, to my knowledge, been employed by Niederhoffer but he later when to have form one of the best track records by using quant strategies based on data.
The Education Of A Speculator – review, summary, and lessons:
It is many years since I read Niederhoffer’s book, but it’s a book I strongly recommend. This is the best book about speculation and trading, in my opinion, although many reviews are negative. Most reviews are focusing on that his two hedge funds ended quite badly, but they miss the point.
The book is a bible in important lessons about the markets. Examples are used from everyday life, poker, and board games.
The last chapter, The Ecology of Markets, is the best analogy I have ever read about the markets. I believe Niederhoffer is well into biology, and he reveals great wisdom and intelligence drawing parallels between the two fields.
For those open-minded and willing to think outside the box, this book is a treasure. It has taught me the importance of actually testing hypotheses using a scientific approach. Niederhoffer also writes the following in the preface:
I can’t show you how to make money by parroting systematic trades. But I can show you something more valuable: a way of thinking that will lead you to greater success.
This is the message during the whole book! Learn to test and to think for yourself.
However, there are some negatives. The book is a very tough read with an unconventional style of writing, perhaps way over most people’s heads, and you need some background on how markets work.
My two main lessons from Niederhoffer’s The Education Of A Speculator:
My first lesson is that you should test, test, and test. Don’t use anecdotal evidence.
The second lesson is the importance of avoiding mistakes. If you avoid the gravest mistakes, the profits tend to take of themselves:
There are som many ways to lose, but so few ways to win. Perhaps the best way to achieve victory is to master all the rules for disaster and then concentrate on avoiding them.
Throughout the book, I can feel that Niederhoffer has a lot of energy, wisdom/knowledge, and is very competitive. He focuses on his mistakes (this was before his blowup), his upbringing, victories, and moments of elation.
Lessons from Victor Niederhoffer and The Education of A Speculator:
I always mark possible quotations when reading a book. This book is so full of them! Here are some random excerpts, takeaways, and lessons from the book:
Some of the features common to most scientific work are: classification, observation, questioning, testing, measuring, collecting information, experimenting, modeling, and revising theories.
I’m aware that it was “unthinkable” to hold a lifeboat drill for the “unsinkable” Titanic. As a reminder, I have a picture of the Titanic in the entrances to all my offices (page viii)
A speculator must think for himself, must follow his own connections, self-trust is the foundation of successful effort. Don’t follow the mentally lazy habit of allowing a newspaper or broker or a wise friend to do our security market thinking.
I have always found it wise to take Wall Street adages, maxims, and advice with a grain of salt. The best way to test taste plausible theories is to quantify, test, and analyze them rigorously (page 19)
If a man didn’t make mistakes, he’d own the whole world in a month (page 20)
During my trading career, I have not had one satisfactory day. (page 22)
The more he talks about his honesty the faster I count my silver (page 27)
Soros once told me once that he lost more money selling short than on any other speculative activity (page 46).
What, then, is the lesson of Delphi? Oracles, forecasts, and prophecies are a business. They should be evaluated with the same skepticism and savvy that would be applied to a used-car dealership or an Oriental rug auction (page 64)
But, as Einstein put it, “if you want to know the essence of the scientific method, don’t listen to what a scientist tells you, watch what he does”. (page 72)
There are so many ways to lose, but so few ways to win. Perhaps the best way to victory is to master all the rules for disaster and then concentrate on avoiding them. (page 85)
A speculator must think for himself, must follow his own connections, self-trust is the foundation of successful effort (page 114)
I’m always telling my colleagues they’re gutless – they don’t go for the edge (page 136)
“Risk taking…is positively correlated with how well we feel about ourselves.” (page 113)
“One thing is for sure. Among the emotionally charged, you will not find one single long-term winner. Where are they? According to Bacon: “These quiet professionals are quite inconspicuous unless you look for them, because there are so many careless gamblers, crazy amateurs, jumping from one crackpot idea to another betting on hope and fear”. I show this passage to any trader in my office who is showing color or palpitation.” (206)
I find that Chinese handball has much to teach me about market practices. A limit order is a good tactic for Chinese trading, but a market order works best for handball trading. The direct market order against a quickly moving target frequently leads to a fast rebound against. The game is then over before it starts….I use limits orders. I don’t win fast, but the losses are a lot slower in coming.” (397)
“…chain smoking, temper tantrums, screaming…these expressions of emotion have within them the seeds of destruction. I enforce a ban against all jocularity and temper tantrums.” (207)
“Offering advice without expertise is aggressive ignorance.” (188)
“With the increasing specialization in modern times, born losers are commonplace.” (85)
“During the 10 years I traded for George Soros, I never heard him speak about a winning trade. To hear him talk, you’d think he had nothing but losers. Conversely, listening to the biggest losers, you’d think they had nothing but winners.” (95)
“Do not follow the mentally lazy habit of allowing a newspaper or a broker or a wise friend to do our security market thinking.” (114)
“The best opportunities come out of the clear blue.” (129)
“The exchange is a market ecosystem.” (353)
“Oracles, forecasts, and prophecies are a business. They should be evaluated with the same skepticism and savvy that would be applied to a used-car dealership.” (64)
“The only newspaper I read is the National Enquirer. I don’t own a television, don’t follow the news, don’t talk to anyone during the trading day, and don’t like to read books less than 100 years old.” (ix – preface)
“My resistance to conformity has been the bedrock of my speculative persona.” (110)
“…institutional learning, like the Harvard Colleges and Lincoln High Schools of Life – the kind that prepares most of us to become good soldiers, true believers, and conformists.” (110)
“An incapability of relying on oneself and faith in others are precisely the conditions that compel brutes to live in herds.” A quote from Niederhoffer’s intellectual hero, Francis Galton (136)
Like most successful people, secure in their trade and stature, I tend to emphasize my losses. The main reason is that it keeps me humble, an essential for success in a field where one false move can lead to irreversible disaster. I’m aware that it was “unthinkable” to hold a lifeboat drill for the “unsinkable” Titanic. As a reminder, I have a picture of the Titanic in the entrances to all my offices…..During my trading career, involving many hundreds of billions of dollars and at least 5 000 days of entering the fray, I have had not one satisfactory day. When I make money, I always want to kick myself for not being more aggressive. On those all-to-frequent occasions when I lose, every dollar hurt.
If you are just to buy one trading book, Victor Niederhoffer’s The Education Of A Speculator is a good choice. Enjoy!