Music Of The Markets
Victor B. Niederhoffer 

by John Sweeney

Trader, speculator, author, and more. The name may be familiar, but there's more to the man than just finance. Victor Niederhoffer has served as advisor to, and investor for, famed investor George Soros and as mentor to Monroe Trout and other financial wizards. More: Niederhoffer is also a five-time US national squash champion. More: Among his publication credits are articles in Liberty and The Wall Street Journal, a cover story in National Review exposing Hillary Clinton's cattle trading as a façade, and his book, The Education Of A Speculator.

 Victor B. Niederhoffer received his undergraduate degree from Harvard and earned his doctorate in finance from the University of Chicago. An active speculator on a large scale for the past 30 years, he now operates as a private investor specializing in trading options and futures on individual stocks and market indices. He writes a daily column at Worldly Investor ( and a weekly column at with Laurel Kenner.

 STOCKS & COMMODITIES Interim Editor John Sweeney managed to talk Niederhoffer into doing an interview, and on January 23, 2001, they chatted, via telephone.


Victor, I've got to assume some of our readers may not be familiar with your background and career, so let's open with how you got into speculation.
My grandfather was a failed speculator from the 1929 era. He was a fellow traveler of Jesse Livermore; he traded with him on New Street at the bucket shops. I once asked my grandfather if he had one stock for me that I could hold onto forever for my college education and my kids, and never have to worry about. He said, "Well,  there's one stock that has a marketing program, a brand, and a market share that's totally unsurpassed, the gorilla -- Western Union." He said, "Just put that one away." I think it was around 110 then and last I saw it, it was at 1/2. At a recent party, I was given a present by my real good friends. They gave me 100 shares of it.

Anyway, he bought me my first stock when I was 13 in 1956. Of course, it was the only stock that he could afford, the cheapest one on the exchange -- Benguet -- 100 shares at 1/2. I waited about 10 years and it finally got to a buck. I made $50 before my $25 commission. I think a few days later it went to $10.

What happened?
It was bought out. It taught me that stocks like to go through round numbers. Anyway, from the time I was 10 or 11, my grandfather would trade stories of the great stocks of his era, like Union and Ferguson, 99% of which have gone belly up since then. That's how I got introduced to stocks.

What was your father's take on that? He was quite an able man himself.
My father was a great man. I wrote Education Of A Speculator to honor him. He always hoped that I would become a college professor. To him, that was the greatest profession, to teach people and to be involved in the intellectual life. He was omniscient, creative, generous, and strong. He was the kind of father who went to every lesson his kids ever took. But he always had the attitude of: "Vic, whatever you say you can do, you'll do. If you say you're going to make a million, I know you'll do it." When he was on his deathbed in 1981 I was going through some troubles with gold, but he was still a great believer.

Your book recounts growing up in Brighton, in Brooklyn, and getting a lot of experience from the streets there, playing and gambling. Did that enter into it at all?
The main influence on me was that my father was a great counter. I remember him sitting around without a shirt, as was the custom on the handball courts in Brighton Beach in those days, and still is today, one of the few places that handball is still played in that area. In fact, it's still played by people in my father's generation. They have a nice geriatric--

Geriatric handball?
Oh, yes -- 80 and over. It's very popular. If you're walking on the boardwalk toward Coney Island, it's always a good sight in the summer. They play on a court about 50 yards west of the aquarium. You can look out on the boardwalk and see the 80-and-overs playing.

I'm amazed, because my knees gave out at 50. I had to give up racquetball.
Warren Buffett is a great racquetball aficionado. In addition to his other great abilities.

Well, you're a squash player.
I'm a racquetball player, also. I was one of the top 10 in racquetball in the nation. I'm the only person with a plus record over Marty Hogan.

Anyway, my father would take a pencil and paper and calculate these things while the greatest players in the history of the game played handball. He was very mathematical. My father was a lot more able numerically than I am. He was part of the police class of 1941. In that class, I'd say the average IQ of the entering policemen was about 160.

They had about 15,000 applicants for 80 jobs and it was quite a good job during the Depression. Infinitely better than a lawyer. Almost all the people in that class went on to be commissioners or college professors or what have you. It was a civil service exam and people were accepted based on IQ for the first time. They got rid of Tammany Hall then. Although Tammany Hall still exists, as you can see in certain Southern states.

But your habit of counting and assessing behavior statistically, is that where it came from, your father?
I was very lucky. I've always had a predilection for counting, but my father gave me the introduction. I think a lot of people who are involved in music learn to count.

You've mentioned music in a lot of your writings. What's the connection to music?
You can't be a musician without learning to count exactly, math-ematically. In fact, my friend Herb London, who is in charge of the admissions program at the law school at New York University (NYU), says by far the best applicants, the best performers on all the tests, as well as the subsequent performers in law school, are musicians.

But music, of course, is a language of its own. It has infinite connections to the market. It's the language of emotions, it's the language of consonance and dissonance, it's the language of movement back to equilibrium, and it's the language of various transitions between themes and movements back to the original tonic. It's the language of the movement of the body, as well as the movement of prices.

And you find some parallels to that in your trading?
Oh, all the time. The market plays music all the time. The problem is you never know how the music of the market is going to end. But a good framework is that it will end on the tonic. Consonance to dissonance back to consonance. And whenever there's tremendous dissonance, strident moves in one direction, a good working hypothesis is that at the end, you'll find consonance again.

What's the best way to track this? Is this a matter of intuitive feel built on experience?
No. Unfortunately, I don't have any intuitive feel. George Soros has a feeling of -- I won't say he has an intuitive feel for the market, but he has a survival instinct that's very well developed, I've never met anyone else who I felt had an intuitive feel for the market. Certainly Buffett doesn't, in my opinion.

And yet you see the patterns?
No. It has to be quantified. When consonance can be defined, dissonance can be defined and a return to the same can be defined. It's a good way of measuring stocks. A good musician, a good composer of music who again has to be very mathematically oriented, or at least did have to be before they had computer programs to help you compose, has to be a good scientist, a good creator of hypotheses, and a tester of them in his musical performances.

...Continued in the April 2001 issue of Technical Analysis of STOCKS & COMMODITIES

The market plays music all the time. The problem is you never know how the music of the market is going to end. -- Victor B. Niederhoffer

Excerpted from an article originally published in the April 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.

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