In the mid-1990s, Victor Niederhoffer asked a friend to scout Southeast Asia. The friend reported that in Thailand the brothels had been cleaned up and people were leaving long cigarette butts in ashtrays — a sign, Niederhoffer concluded, of a population with money to waste. The Thai stock market had been down. He thought it was due to go up. In 1997 he bet big: his money, his investors’ money, and money borrowed on margin.
The Thai market collapsed later that year. It cost him his hedge fund, a large share of a substantial personal fortune, and his reputation.
He died August 4 at 82, and the Journal’s obituary is the best investing essay of the week, because it is really about one idea: the difference between a pattern and the wish for one.
He was, genuinely, that good
The track record is the kind people stop believing exists. As a student at Harvard and the University of Chicago in the 1960s, he argued that markets had patterns and did not behave randomly — a radical position then. He did well enough that George Soros hired him to run money. He was reported to have compounded 35% a year for fifteen years. Businessweek named him the top commodities-fund manager in the country in 1994. His memoir was a New York Times bestseller.
He also won five national squash championships, ran to the Harvard Club carrying his racket, wore loud pastel clothes embellished with whatever he had eaten, refused air conditioning in his office so his traders dripped with sweat, kept a pet monkey while teaching at Berkeley, and competed in mismatched shoes — different colors, different brands, one high-top and one low. He was, in his first wife’s words, “a conundrum or a paradox. All those words.”
The lesson he wrote himself
After the wipeout he kept looking for patterns and kept trading. By the early 2000s he was managing money again and, for several years, putting up returns around 50%. He also knew exactly what the stakes were. “In America, people get a second chance,” he told Bloomberg Markets in 2006. “They don’t get a third.”
Strip away the genius and the squash and the monkey, and the Thailand trade is the most common mistake in household finance. It has three parts, and all three were present.
A real insight, stretched past what it could carry. Niederhoffer’s instinct for ground-level signals — Big Gulp cups, cigarette butts — was genuinely useful. It was not a thesis about the capital structure of an entire emerging economy. Most people’s best investing idea is similarly true and similarly small.
Conviction expressed as concentration. The bet was not wrong because Thailand fell. It was wrong because his fund, his savings and his reputation were all in the same place when it fell. A thesis that is 70% likely to work still ruins you if you cannot survive the 30%.
Leverage, which removes the second chance. Margin is the thing that turns a bad year into a last year. He said so himself, nine years later.
The version we meet
We do not meet people who bet a hedge fund on cigarette butts. We meet a retiree with 60% of the account in the employer’s stock because it has “always come back.” A physician who refinanced the house to buy more of the one idea. Someone who read a pattern in a chart and did not read the part about surviving being wrong.
Niederhoffer’s brilliance was real and his ruin was self-inflicted and both are true of a great many smart people. The question a plan exists to answer is not are you right? It is what happens if you aren’t? — and whether the answer still lets you get up the next morning, find your racket, and run to the club.