Victor Niederhoffer: Lessons of Making and Losing a Fortune

black swans. And and if you think about taking the other side of the trade from not seem to leb Well, when you're right, you're gonna make money, but when you lose you're wrong, you're gonna lose a ton of money. And and that seemed to be what happened to Niederhoffer in the oh seven O eight o nine collapse. UM. He's had a number of uh astonishing setbacks that he's

more or less recovered from. He still carries scars from from some of the losses, but by and large he is an accomplished and fascinating person, and I think people who are active traders can stand to learn a lot from his experiences. So, with no further ado, my conversation with Victor Niederhoffer. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest today is Victor Niederhoffer. He is known as one of the legendary traders on

Wall Street. He studied statistics and economics at Harvard, got his PhD at the University of Chicago, briefly taught finance at Berkeley University before he began trading in ninety nine, when he turned fifty thousand dollars into twenty million in eighteen months. He was top trader for George Soros before starting on his own in the ninety nineties, launching his own fund. Then. He is the author of the classic investment text Education of a Speculator. Viktor Niederhoffer, Welcome to Bloomberg.

Thank you very much, Barry. So. I am a fan of some of your writings and some of your work. I know of you through your reputation and your legends. You have a really interesting background. Your father was a police officer in New York City. Your mother was an English teacher. From that beginning, how did you find your way into finance? Well, what a policeman he was. He was in a class of nineteen thirty seven, which was the first time that civil service exams were given for policemen.

Before that it was based upon m who you knew and your ethnicity. So in that in that class they had, which was in the middle of the depression, they had about fifty thousand applicants for two hundred and fifty jobs, and the two hundred and fifty jobs were decided based on a combination of physical i Q and intelligence i Q. So all the people in that class, including my father,

were geniuses. Uh. My father, Um was a full letter man at Brooklyn College, and he had a pH d in a law degree, and he was a founder of John J. College and univer Versity, which at that time had fifteen students and now has eighteen thousand. And he was omniscient. So I always had a very uh intellectual background and a physical background from and in fact, let's flesh that out for listeners. You were the national amateur

champion in squash. You're a highly regarded tennis player. You competed at the professional level in in racket squash, um surprising the number of pros by beating them, and on the intelligence side, no less than seemed to lab called you the most brilliant person he's ever met. So apparently the apple does not fall far from the tree. Well, m I wish I was half the man my father was. Um and uh, but you might as well since the one thing that I really have been very successful at

was my rackets career. On my uh, there's a a very famous rackets player named Steve Keiley who was the number number one racquetball and paddle ball player in the in the world in the mid seventies, and he once described me as the best all amount, all around racket player in history. And I did win the us UM Amateur Championships five times and the North American Pro which at that time was the World Championships once so uh.

And I was in the top ten in racquetball. So I did a lot of racket playing and but like everything else, success is fleeting. And last week I had a challenge match with your colleague Joe Weasenthal. And before it, I played a woman who was the who played with a paddle racket against my tennis racket. She uh m hm, so I had a big advantage. How did you do? She beat me twenty one to twelve. So a lot

of a lot has changed. I had played on those same courts fifty about fifty eight years ago, and one the what was then called the the National paddle Bowl Championships, which they played with tennis racket in those days. And so in fifty five years I went from the top two and also ran in the markets like that. Also, let's begin with the quote of yours that I really like. Speculation,

like most activities, is an art. Science attempts to answer the pivotal question of speculation invariably raised twice as many questions as they solve. That that quote raises at least two questions I find fascinating. What do you mean that speculation is an art and a science? Well, I I believe that in order to be successful speculation, you have to be very systematic, you have to do a lot of counting, and you have to have a scientific men. But also I I don't believe that algorithms and robot

trading is the secret to success. I believe you have to have a higher framework. My higher framework involves a combination of ecology and statistics, biology, physics, and it's very important for anyone who wants to be successful to have a good foundation that overrides the ephemeral and the transitory aspects of the market. Why do you say that each inquiry raised twice as many questions as they answered that. That's a fascinating observation. Well, the beautiful aspect of speculation

is that it's all encompassing. It covers um every economic, political, psychological, and biological facet of life. And in order to be good at it, you need to have a grounding and an appreciation of all these subjects, besides being systematic and knowing how to count. M hmm. It's a little more

than knowing how to count, though, isn't it. You need to There are some people who do a lot of counting, and I I'm happy to say that, uh, I invented that what's perhaps the major, the major utilized tool and counting.

I invented that thirty years ago, basically the idea that there are multivariate time series relations between markets that vary by day and time of the the day, and that has become the mainstay of of many of the many thousands of my competitors and followers who have used my program of variants of it, which I invented thirty years ago. You also invented thirty years ago, one of, if not the first software written as a trading program. You were decades ahead of the rest of Wall Street. Tell us

how that computerized trading program that's about. That's an interesting story, and it's had a lot of unintended consequences. It was inevitable. It was going to happen eventually, of course, yes, But but you started before people were really think. I'll tell you how it started. It started and unique fashion that probably has never happened before. When I got into business, I started a business in being a merger broker. We're called finders in those days, an investment banker. I was

not an investment banker. That people used to try to criticize me and say that I sold businesses the way Colgate sold toothpaste, which I took as a great compliment. In one of those aspects, I was visiting Tandy Cooperation and they were an owner of radio shock if Memory serves. At that time in their catalog they had first developed and offered for sale a radio Shock TRS a D,

the first user programmable computer. More or less correct, I was one of the first to buy that computer, and I bought one from my younger brother, Royn eater Offer, and he and I. He was about ten at the time.

He subsequently developed a game business where he had about seventy of his colleagues in elementary in high school working for him and I. Then UM used that radio shack computer which had thirty about fifteen thousand UM bits of memory available to program a systematic multivariate time series program with a young assistant of mine named Susan, who was so good at programming and so efficient and also very good at racquetball that ultimately, UM, we started living together,

and it's about we're we've been married for thirty or forty years and and been with each other for about fifty years forty five years. So you grab await from the University of Chicago, which is known as the efficient market hypothesis capital of the universe, and yet you UH start pushing back against the m H immediately saying, now, I think there are patterns visible and market trading and short term there are ways to beat the market and and earn UM identify UH. Short term, there are ways

to identify opportunities that are consistent, repeatable. How much pushback did you get from the E m H crowd at Chicago, well, we were all a bunch of ignoramuses in those days, and they had some crutches and old sauce that they like to use based upon um distributions with infinite variances. They called them Paradouh distributions, and there their acts. Their bias at that time was that everything was random, and that all um known information was immediately in captain the market,

and there was no way to make a profit. And I was I've always loved to go into the stacks of libraries, and fortunately the Harvard Business Library had one of the best libraries in the world. And I would add I've been fortunate to be associated in my three stints at education at Harvard, Chicago, and Berkeley. Each one had a great library, which I used to the foremost.

But I used to look at the Harvard had something in those days which no one else had, which was the Francis Emery Fitch Sheets, which had the record of every transaction, which in those days were about twenty thousand transactions a day on the New York Stock Exchange and the American Stock Exchange. And I looked at those transactions and found that there was a tendency to reversal at

the microscopic level, and to continuation at the macroscopic level. Now, in other words, ongoing trends tend to continue, but there are short term reversals against the dominant trends. That's what I noticed. Of course, the markets are ever changing, and I wouldn't say that's true today in general. But I then looked at a in one of my florays in the evening I've always been like to read late in

the night. Harvard had bound copies of all magazines, all scientific journals, and one of them was called the Monthly Weather Review, and in a like a nineteen sixteen article, they had an article about runs and sequences, turning points in weather. And it occurred to me that it would be useful to look at runs and classified by the

length of run in the market. So I started. While I was competing on the squash and tennis team, I would take the ticker tapes, the Francis Emery Fitch sheets, and i'd stought owning reversals and continuations, and I found that it was about nine times as likely for there to be a short term reversal as a continuation. And I wrote an article on this and UM. It was published in the Journal of the American Statistical Association, was the lead article, and I applied some what they called

some Markov processes to it. So when I went to Chicago, I had this under my belt, and it created uh, tremendous negative feedback with hysteria and tremendous hatred from the random walkers UM, who then were following the idea that everything was efficient, and they manifested this hatred in many ways,

so cognitive dissonance its head. Rather than accept the data, they doubled down on the theory because you also had data showing that there was a consistent pattern between what took place on a Monday and what took place on a Friday. And even though there was a lot of data, they seem to have a hard time with that. Well

that's that's another story. But as as an example, the Business school was it was situated in a place called Haskell Hall at that time, and one time I was coming down from the third floor and and speech echoes up and four or five of the random walker is, including two of subsequently one Noble prizes, uh what talking And they were studying us some computer output on stock splits and I heard one of them say, Wow, you know, we're really in trouble. If we find some regularities here,

now this, this could defeat our ideas. And I memorialized that conversation and I did not neglect UM two UM HM to elicit it and some of my presentations. You put together quite a track record. You had a twenty year run up of or better annual returns. How on earth do you put together a track record like that. Well, it was with a small amounts of of money, and it was certainly unsustainable. But during that period, two or three times I won the award as the best performing

UM managed to count. These were commodity futures commodity futures traders. And I got another award in nine UM right before the debacco that I believe is on the tip of your tongue, the tie Bot crisis and uh what that did to currency and commodity prices. I had the model of George Soros, who I was very intimate with at that time. We most have spoken thirty fifty times a day, and he always said that he made more money from things he didn't know about than things he did know about.

And I unfortunately ran with that idea, And I didn't know anything about emerging markets, but I sent my before mentioned friend Hobo Kiely around the world to visit every emerging market, and he came back um with the idea that India look good, but they charged you a half a percent of one percent on every transaction, and they

had some hi um barriers to to entry. But he really favored Thailand because on his previous visit the brothels were much and much worse shape, and they had really cleaned up the brothel act, and he felt that that was his economic indicator. Yeah, and the length of the cigarette stubbs. If people only smoked half a cigarette and threw away you had you had referenced that it meant they felt confident and had lots of discretionary money. He had a number of of indirect indicators like that, um.

But in any case, they promised low commissions, and the brothels were were very clean and they didn't use strong arm tactics against the the visitors the way they did on his previous visit. He didn't tell me that percent of the buildings had stopped construction construction and at the fourth floor, but in any case, I it was the worst performing market. It was down about at that time

when every other market was up ten percent. And I had had done some work that um, the worst the worst performing groups in the New York Stock Exchange during the next year always were the best performing and the subsequent subsequent years and went from the worst to the to the best. And can you extrapolate New York stock groups to international? Regrettably not, but I I did. I did extrapolate it. It seemed like I had everything. I

had the cigarettes, the brothels, and the commissions. And the price is the price of a coke was something like two cents uh there at that that time. And so I got in and uh didn't work out. Oh, it really used up a lot of my capital. I my liquidity was tremendously um reduced, and I was not able. Um two. Well, I'll tell you something that's very important. You were talking about my family before. My grandfather once told me that the worst thing in the market is

to get in over your head. He was a speculator, traded in the twenties right up until the crash. He had the pleasure of trading with Jesse Livermore. Really and in fact, um, so your grandfather traded with Jesse Livermore. You traded with George Soros. That's quite a family lineage, yes, UM, somewhat, as they would say at a sepcoic in UM both both cases. In fact, my grandfather took lessons from Scott Choplin piano lessons and yeah, and he knew a lot

of the unpublished rags. And he was the treasurer of Irving Berlin's public shring studio in nineteen oh seven, and he had the unfortunate, uh experience of being liquidated during the nine seven crash, which was very similar to the two thousand eight crash in the and then yeah, he anyway, he always told me never getting over your head. I was in over my head, uh, with taught with Thailand

and with option trading. You dropped the phrase epicyclical. And I want to reference that because in genetics there's a concept of and I'm getting the word wrong, epigenomics or the possibility that experiences can be transferred from one generation to the next. Is that what your references No, I'm not UM talking about the selfish gene and the fact that um or activities are designed to maximize the fitness of of our and replicability and survivorship, UH, prevalence of genes.

I'm talking in the old days. UM. The astronomy is used to try to calculate the motion of the big orbits of the planets, and they had come up with Ptolemy came up with about thirty different equations to finally to calculate how the planets moved before Newton the retrogrades, thinking the Earth was the center of the Solar system

instead of the Sun. Is that is that what you're referencing? Well, then Copernicus and uh and Tico Debra came up with various equations and they called those equations epicickly of course, so they were overdetermined and they had too many, too many equations for the variables that they were trying too much. By the way, that's probably the biggest mistake that the systematic and the amateur trade and makes in the market. Too too much complexity with simplicity will do They call

it multiple comparisons. It's UM implicitly to have UM numerous hypotheses that they're testing what that they know about, and then they try to fit that to a very small, um small number of observations. I I read that you're a great believer in UM indexing. Well, for the average person, I think there's also a place for for a tactical

there is a place for active management. But the average mom and pop investor, for the most part, can't pick stocks, can't time markets, can't hire people to pick stocks or time markets, and so I think for them, Jack Bogel had it right. I think you have it right, and Jack had it right. By the way, he's a squash player that I've had some contact with. Any good Is he any good? Yeah? I think he was. He was quite a good player. I s eighties seven something like that.

He was just his birthday, not to and and the Sage of Nebraska as a racquetball player. Larren Buffett, Yes, I had no idea. Let's talk a little bit about Soros before we start talking about your funds. You were trading fixed income and currencies for Soros for for a long time from eight two to What was that like. He has a reputation of really micromanaging every trade. What was it like to to be an active trader under Soros? M? Well,

he taught me M quite a few things. Um. The most important was that you should always use two cans of tennis balls when you were when you were playing. Um that because if you have one can, which used to be three bulls, then you spend half your time chasing balls, whereas if you have two cans, then of the time can be playing and you can let the bulls. Is there a metaphor there for life, for trading or is it just about tennis. No, there's a metaphor for for life. You have to look at the big picture

and don't don't worry about the ephemera. And of course, in my day I I played tennis every day with my father and we would shovel snow off the courts in Coney Island to play. And to have one new tennis ball was considered uh a luxury, tremendous, tremendous luxury. And the idea that you could actually have spend money for two cans and with alacrity was astonishing to me. And what else did you learn from Soros besides always

bring an extra can of tennis balls to the court. Uh, No one in the world has a better instinct for survival than he does. And both literally literally having escaped the Nazis and figuratively as a trader exactly exactly. And he I remember, as mentioned, we spoke fifty sixty times a day continuously for about ten and twelve fifteen years.

And remember during the October seven crash on Thursday, October uh he sold all of his stocks, just liquidated them at the open he made he made he made so many traders on the floor of the Mercantile Exchange multi millionaires with that trade. But it occurred to him that he could um face destruction, and he did what he had to do. He liquidated his entire position, took a huge loss, thinking that survival was more important than anything else.

And I believe he did the same thing with Mr druck A Meyer in the two thousand period when um drug A Miller attended a conference in which it was mentioned that there's no such thing as a proper valuation forum internet stocks for technology stocks, and that you know it's based upon it should be based upon views and potential. And then he he went ho hog and bought a tremendous percentage of his fund into the the companies with multibillion dollar market values and no earnings and little sales

at that time. And I believe that Soros had the same reaction that he did in nine, just liquidated the entire position. Thought that survival was at stake, and I believe I believe that. I believe that was the key UM in this year. The key UM, the key reason that their partnership ended at that time, is the key takeaway you got from Soros. The importance of survival in the investment markets is always always lived to fight another day.

Is that the most important lesson he teaches. Well. One of my mentors, Irving Riddell, always um said the market will always be there. Then the next day. I should have known that. My grandfather told me don't get in over your head UM, and from my rackets career, I should have known not to play the other person's game. I should have should have learned that from sorrows escaping from Hungary UM during World War Two. So after sorrows, you launch your own hedge funds. Tell us what that

process was like, who your clients, how the fund do? UM? Well, again, I I had some as my wife likes to say in her m HM curriculum Vita. She's the director of some of UM, the firms related to John mc key's Whole Whole Foods UM operation and conscious capitalism as as she likes to say. And she's been the director of on the board of every Montessori school that we've sent

to our kids too that she's been associated. She's and some of the years we were the best performing fund, and in some of the years we were the worst performing fund. And then UM, when I had the tobacco in seven, she offered to resign from all her boards, but they didn't. They didn't accept her resignation because she was too good at what she did. So you launch your funds, who are your clients and and who's investing

with you? Well, I had a number I had a lot of people who mistakenly thought that because I was so good in racket sports, and because I had a very good academic reputation, that I might be good at UM investing. And I did have a good track record for many years. It was in nineteen as I mentioned, in nineteen nineties, the twenty years prior to seven, you were compounding at thirty a year. Well, again, that's a phenomenal run. It's it's a lot of it's a lot easier.

As as you may know, when I started out in business, I I knew nothing and I took fifty thousand into twenty million in about six months. It's got to be more than just dumb luck. It was very wrongful, very meaning I did. I did a lot of um, a lot of bad things. Was very but you were trading much,

very very much over my head. And it was just fortunate that during that period, ah, I had a foundation where I believe that, uh, sort of the way a lot of people do now, that the world was coming to an end, and that gold was going to go from two hundred to a thousand, which it did, and that the yields on bonds we're gonna go from in those days six percent to twelve percent, and during that six months it did. But so you were right. You had some big perspective views and they turned out to

be correct. Fortunately. I also had learned a little something from my forays into gambling and racket sports. And most people make the mistake of putting a limit on how much they're going um to lose, and they tell the they tell the partner before they start gambling. You know, dear him, if I lose more of them a thousand dollars, I'm out of here regardless, And don't no matter what

I say, don't UM. Don't listen to me. UM put put the ear plugs in your ears the way UM ulysses Um shipmates did on his travels before the Skilla and Charybdis and the sirens. And I, fortunately UM had a m had a remembrance of those. It sounded, it

sounded sensible. So when I got up to twenty million, I told all of my UH colleagues, including the future Mrs Niederhoffer, I said, if I ever get down to ten million, if I lose more than half, liquidate me regardless of anything I say, don't listen to me, because I'll probably be begging you not not to get out. At that time, well, I I had there was one player in the New York City area who could give me a game in racquetball. His name was Ruben Gonzalez

and he he still is at sixty years old. He's in the top ten and racket ball, and he was the pro in the Staten Island Court Club. I went to Staten Island one day during the morning and I UM. We played UM two two games and it was one wall. I made a call to the office and they said, you just lost half your you just lost three quarters of your steak and you're out of the mark. I said, what are you crazy? And and what happened by the time by the time I got out and lost another hand?

It was the first they started looking within a ten. And yeah, and in those days, to only lose fift was pretty pretty good. And Ruben Uh, about twenty years later said to me, no vic, I remember that game, and when when when we came back for the third game, you seem like like a different person and you weren't. Yeah, you are so uh, you seem so preoccupied, uh with other things that it was easy, too easy to beat you. That so losing three quarters of your fortune affects the

irracket game. Is that the takeaway there? Anything, anything affects your market game and your racket game. Everybody loves a comeback story. Tell us how you managed to after going through that debacle. How did you manage to rebuild um your trading positions? How do you find the confidence to say, yes, I could do this. This was just an aberration and I'm going to overcome this. The story is a little

a bit more complex than than that. It is one of one of the aspects of of life is that sometimes a tremendous quantum event um can which is seemingly very good um, can have negative consequences, and vice vice versa.

From adversity often comes a great success and from racket spot it's almost every good racket player will will tell you that the most important lessons and the most the greatest improvements in their life came after tremendous defeats um and after my various debaccos, which, as you know, I've been trading for fifty fifty five years, so I've had some great successes. And in fact, you said that you had. I want to get the numbers right because I want

to specifically reference some of these successes. You said, when we look at the number of trades you have that have been successful, your hundreds of standard deviations away from the norm, you trade it over too million contracts with the average profit of over seventy dollars per contract. That's about a hundred and fifty million dollars in games just from from those trades. In other words, this is not purely random. There is obviously some skill to that much

successful trade. All right, now, I have to talk about a great man. Man I loved His name was James Lourie and without him, I wouldn't be in business. He gave me my first job and he UM. He was the founder of the first major statistical study of returns in common stocks. They called it CHRISPS the sender for research and security prices. That's a huge database these days.

Not only is it the huge database, but along with Dempson, moh and Stunting, it's UM the most important thing for UM the investor to comprehend and hopefully to read ah in any In any case, he helped me get through my thesis with all the detractors and haters that were always around trying to um do me in. Yeah, they they I was not a favorite son there, but he steered me through. It helped me keep my scholarship. UM

helped me defend my thesis. He was my thesis advisor, got me my first job at Merrill Lynch, my first clients president of Sunbeam, and his daughter Um was He became a traitor on the Chicago Options Exchange and then she worked for me for fifteen years. Name is Erica and Jim once came to my office whenever he came to New York, and he was on ten different boards

in New York. He would stop by and he said, Victor, if you had told me twenty years ago that my daughter would be working for you with all your regularities and UM predictive patterns, I went have believed it. And that, to me is the greatest compliment that I ever received, that he was able to say that his daughter would UM find a proper home in my multivariate time series programs and analyzes. Now, some of those statistics again are

again not very meaning focus. They were it's a lot easier to make money when you're trading a few contracts UM then when you're trading a lot. But my experience for soros Um was not altogether positive in the sense that he he liked UM not only to have me trade for him, but he would trade parry passu. He liked to call it for his fund on the things I was trading with, plus parry pessu for his own accounts.

So in other words, he would piggyback your trades. So there would be when I'd make a trade, and and then it was also my own trades. So if I made a trade UM, the quid pro quol was I'd make the same trade for him give him the same prices and for the fund and for his own account. So there were three levels of trades. Might my trades might have been in those days for a stated um market value of thirty million, but for his fund would be for two hundred or three hundred million, and UH

comparable for for his own accounts. So when I traded UH, if I traded twenty contracts for myself, did be two hundred before d for um the Parry Patsu boys. So it got to be so I was always when I had a position, I was always frightened because how was I going to get out of these this position? Because when I did in those days a fifty contract um the position you know, five million market value in in

bonds or ten million in currencies was was big. I had to two hundred, five hundred, sometimes a billion that I had to go in front of me. So I became very very much. That has to affect your execution. It made me very short term oriented. When I had a profit, I was very quick to take it and I was very quick to get in when and you can't get into to a big position like that unless it's going the opposite way. So when the market went down,

i'd buy it. When I went up and I became I thought the Federal Reserve should have paid me a endowment because I maintained equilibrium and homeostasis in all the markets. If it ever, you're creating liquidity where there was none. I created equilibrium. I prevented moves away from the the normal, the normal workings and the balance the harmony of the markets. The markets are always in harmon and if one gets out, then the Federal Reserve would or the central banks would

try to um reduce the disharmony. But instead of they're having to work, I was doing it for them, and very frequently UM when I traded, the central banks of Japan and and of Germany would be trading it exactly the same time. And not not only because they were trying to equilibrate, but also because in those days they had squawk boxes, and the squawks boxes would immediately um

lead to they're doing exactly the same thing. So I became very um, very much um A a dis dis equilibrium UM homeostatic um playing trader, and that is no good. So let's talk a little bit about the comeback, which I think people are gonna find I'm going into that comeback. I realized, my brother, it's a lot smarter than I am, a lot more successful than I am. He's now the chair of the New York City Opera, which she brought out of bankruptcy. When he plays twenty two different instruments.

He's brilliant, very fine guy like my father. But he once said to me, Now, look suppose you were in a situation where whenever you made a trade, UM, you told it to someone else and he traded a hundred times as much as you, and UM, for that UM, you received ten percent of the profits. Um. What what would that do to your executions? And would you make

or lose money? And I said no, I went, I certainly, if I had to trade a thousand contracts rather than fifty, I certainly the give up the vague would be bit as spread would certainly reduce my profits to zero. And he says, so why are you doing it? And at that time, I fortuitously realized that I was doing the wrong thing. With sorrows gave him. I said, look, we gotta stop this. We'll still still play tennis and chest together,

and I love you. But that said unfortunately, and his first book UM before are before he seven relations with me, He wrote, I was the only guy who ever gave him back his money and stopped UM, stopped trading from while I was still way ahead, so that that that was true. But in any case, after and after two thousand and seven, I realized that it was dysfunctional, harmful for me. Two have a UM, A fund that I do much better trading for myself. And that's the only

thing I do. I trade for myself. I have a bunch of very loyal and competent assistance I have. I have no I have no fund, and I have no desire to have a fund. I have no UM. But post seven, you had quite a staff of statisticians and mathematicians working with you trying to pick something up. Well, I'm talking about after two thousand seven. Okay, Now, from seven to two thousand seven, it was a roller coaster of it was. It was a pretty good UM. It

was a pretty good run. As I say twice during that period, I was voted the best trader in the world. I got trophies, and you managed to rebuild your fortune quite You recovered most of, if not all, of your losses from if I'm remembering the story correctly. You know, again it was from a very small, small base, uh, nothing to be ovally proud of. But in any case, I did have a good run uh to two thousand seven, but I made some terrible mistakes there also made them

very so, very bad errors. So let's talk about those eras briefly. If I could sum those up, it's essentially you embraced risk and used a lot of leverage, and you're at that point at the mercy of your brokers. Even if your trades, some of your trades that didn't work out, had you had the ability to hold onto them for another six months, would have been how about another six hours? Six hours? So what do you do?

You had a very um, a very good summary. I'm I'm very impressed that you were able to encompass the the gestalt, the gist of of my downfall. However, downfall and recovery, however, I think you gotta mention with the down in the up You can't ignore them. However, there are some grave uh technicalities involved in my downfall, and the technicalities have to do with the fact of what is called flexionic activity. I'm actually searching for that phrase

right now. Yeah, look, at Janine Woodell. Anyway, a flexion is someone who has his hand in many different areas in the government, as someone who's a consultant, who's a politician, who's on the board of he's on the board of various um and and geo's. It's a professor at a university, he's a he's a writer for the big publications. And there are a lot of them, a former a former executive at a big military firm or a big lobbyists. So the flexions are people that you can't they're very flexible.

You can't really pin what they're position is. And anyway, there were flexions in the markets that I traded, and these flexions were on the margin committees and the market making committee, and the trades that I put on they were regrettably only two or three market makers. So you really don't have a lot of flexible. The normal bid spread is fifty to the kinds of things I traded. Might be UM bid it a half and offered it seven.

Doesn't sound like much, and if you do it in terms of volatility, it might be like percent qualitity versus twenty nine percent. But I meanwhile, it's a bit ass spread so that if you try to get out of these positions at any time, and often I had a position with market value of a hundred million or more,

the immediately lose fifty million dollars. Now, when the market goes against you, the people on this market making um uh pit we're also on the margin committee, so they would raise the margins, which happened to me by um fifty for front by a fifty percent to by fifty to. Whenever the market had a had a decline of half

a percent or more, they raised the margin. So that and then of course when uh they also set the prices and often um the market would stay the same, but the underlying market would stay the same, but the prices of my options, which I was short, would often go up by My investors were very upset because the market hadn't moved. And as they'd say, you know, when the market goes down, you know you make five or ten percent. Uh Ma, market goes up, you make five

or ten percent. One market um goes down, you lose twenty in a daycal and how could that be happening? Well? Um, what was I I couldn't get out of the positions because there was a fifty normal bit as spread if you ever tried to liquidate, it would be a hundred

or two let alone. What would happen if if you had to liquidate during a panic, and let's put some flesh on the bones as to the margin you with futures trading at the time, you would put up one percent and then they'd raise that one percent mid trade down the road when we hit some turmoil to two or three or four percent. The quadruple, Well, you have to put up that qualitatively. What what you say is true.

But between the unfortunate um and very reasonable uh dissatisfaction of my investors who uh well withdrawing funds, the tremendous um bit ass spreads, the um, the raising of margins, the setting of prices UH that were totally out of line with what what they should have been in terms of normal volatility and pricing, plus about ten other mistakes I made. I was able to shoot myself in the foot, did myself, and and I was I was forced to um and to say nothing of the clearing firms who

were very upset by the potential for great losses. Fortunately, in the case of two thousand seven seven, there was not any my clearing firm made a fortune from my trades, and I was able. I ended up and the whole. But I, of course, I had made hundreds of millions beforehand, and you know, in in total um, in total um, it was profitable. But so it was. It was a tragedy and a tobacco But what I'm getting to was that was it no more, no more bit spreads, no more,

no more being forced to liquidate. And in a panic where a hundred million dollars of positions I had in order to get out would of course me four hundred million. I don't have a hedge fund, and I'll never I'll never go down that road again. Let me say one thing. That's the real story about why I lost, not what nasty to tell of says, or not what the spreads spreads and the and the flexions. We have been speaking with Victor Niederhoffer. George Soros is trader of author of

Education of a Speculator. You can check out my daily column on Bloomberg View dot com or follow me on Twitter at rid Halts. I'm Barry Ridolts. You're listening to Masters in Business on Bloomberg Radio.