Practical Speculation [Paperback]

The authors show that in order to think rationally about investment decisions, and the uncertainty of markets, the crutch of received wisdom needs to be abandoned, and an empirical, scientific approach adopted in its place. With easily followed statistical arguments (and a healthy dollop of common sense) the authors readily demonstrate how so much of that which is taken for granted in the financial media is often nothing more than repeated assumption and propaganda. Whilst so much is dismantled and exposed - as either noise or error - this is certainly not a pessimistic book. Instant formulae to riches might not be proffered but the book could certainly help engender an investigative, skeptical mind able to uncover its own profitable trades.
This book stands as a beacon of reason midst the swath of Buffett hagiography and tea-leaf technical indicator manuals which festoon the bookshop finance shelves. It is a wake-up call to anyone who has succumbed to the lazy thinking which gives this vast cornucopia of clap-trap a market. It is also a very lively and playful read running a gamut of ideas from Francis Galton through to memetics, detouring to take in horse-racing, chess and varied other sources of insight along the way.

This book researches various methods of trying to predict stock prices, and tears them in pieces limb by limb.
There are three things that, in my opinion, are seriously flawed in this book.

Firstly, although the authors make a laudable attempt at tackling various stock market indicators with scientific methods, their research seriously lacks depth. Let's look at one example - the chapter on technical indicators.
The authors ridicule the so-called experts who do little more than present cherry-picked examples that appear to prove in hindsight how their pet indicators can indeed predict price movements, while ignoring other examples where their indicators fail. They say "this is an art, not a science" to cover the fact that they actually have no clue as to what they're doing. No objections from me so far.
Now, the authors analyse various technical indicators by defining clear criteria of what they are looking for, analyzing large amounts of historical data and displaying their results on scatter diagrams. Unfortunately, they research very few indicators, including an obscure one I had never heard of before.
Most ironically, the authors actually find one technical indicator that does correlate with price movements. In spite of that, they spare no venom ridiculing people who believe in technical analysis. That space could have been put to better use by testing more indicators, for instance MA's, RSI, MACD, BPI and stochastics. I mean, if you don't say one word about indicators that most people actually use, how can you so bombastically exclaim that you have invalidated all technical indicators (100+ of them, as we're told in the beginning of the chapter)?
In short, the authors' so-called scientific method is equivalent to visiting Egypt, Morocco, Canary Islands and Kenya, and drawing the conclusion "there are no black people in Africa".

Secondly, the authors appear to be making the amazing mistake of equaling negative correlation with randomness. That is, they look at the indicator XYZ which is commonly believed to correlate with future stock prices. Analyzing decades of historical data, they demonstrate that actually XYZ correlates negatively with future stock prices - that is, contrary to prevalent believes, the stock prices tend to fall, not rise, after XYZ has risen. Then they make the conclusion that XYZ is unusable for predicting stock prices. It really doesn't seem to occur to them that if the correlation is negative, XYZ can be used as a contrary indicator.

Thirdly... um, this is too weird to even write about. Well...
On first two hundred pages, the authors let their burning-bitter irony mercilessly loose on people who base their trading decisions on things like news media, superstitions, Nostradamus, Fibonacci, as well as numerous coincidental correlations. "Earnings propaganda", "fuzzy measures", "irrational ratios", "mythology of momentum", "a venerable indicator of great ambiguity", "the cult of the bear", "mythical market hero" - such expressions are very characteristical of the authors' style, as well as the words "myth" and "propaganda" repeated ad nauseam.
Then, after the authors are done criticizing others, they start suggesting their own ideas. Chapter 11 is dedicated to... baseball. It analyzes in length the connection between stock market movements and rule changes in American baseball. On page 239, you can see a table comparing yearly numbers of home runs with Dow Jones, and two pages later, a chart on the same subject. (Honestly, I'm not making this up.) All that is accompanied by a theoretical explanation why it would make sense that stock price movements should correlate with certain important events in baseball.
Suddenly, I felt very silly. They are pulling my leg, I realised. This entire book is a parody, and I've been reading it for 200+ pages as if it was for real. Reluctant to admit that I had been taken for a ride (and a very long one), I re-read the chapter again, looking for any signs of joking. I found none.
Greatly confused, I kept reading. Chapter 13: Market Thermodynamics. With my mouth wide open, I read how money was supposed to act like energy, subject to the laws of thermodynamics, entropy... To make the long story short, I never read Chapter 14 which is titled "Practical Market Lessons from the Tennis Court".

Before I conclude this review, I just have to mention something I found absolutely shocking. It's not about stock markets, but it's in the book, so I am allowed to comment on it, am I not? It's about Mr. Niederhoffer's telling us how he totally controls her daughter's life, having assigned all her time to specific activities, hour by hour, with no breathing room whatsoever. I used to think my mother was a tyrant but this is beyond my wildest nightmares. I wonder what it must be like to live in a country that grants its citizens considerable freedom, and to have at home your very own Kim Il Sung who takes it all away. Mr. Niederhoffer has the nerve to call it "guiding Kira in making most of her time". Clearly it has never occurred to him that he's doing anything wrong. Well, all I can say is: God help the world when that girl gets loose from her golden chains.

All right, enough of the girl stuff. Let's get back to what we're all here for, money.
What I liked most about this book: it gave me very valuable insights and tools to do my own research on stock markets.
What I disliked most about this book: it touched superficially one subject after another, failing to convince me on hardly any of them.
And... I'm still not sure whether or not this book is meant to be taken seriously. But if it really is a parody, it's the most subtle parody I've ever seen. And the authors aren't even British.

The book by Victor Niederhoffer (VN) and Laurel Kenner is written in much better style than VN's first book. Unlike his first book, which describes a sort of 'blood and guts' style of investing, the authors believe that a more empirical approach points the way towards investment success even though I did wonder occasionally, if they follow their new investment approach to the letter.
In Part One, the authors pour cold water on the mumbo jumbo of investment analysis and the art of predicting (future) stock prices. Personally, I have always considered technical analysts a bunch of loonies and VN does not offer any evidence to refute this belief. 'The Cult of the Bear' and 'We are Number One' are similarly exciting investment concepts, the world could happily do without. However, they will of course continue to persist; hence do not skip Part One, if only for recognising them for what they are.
Part Two 'Practical Speculation' details the author's approach to investing. Along the way they mention their favourite investment book - I won't mention it (but it is on my shopping list) - quite a few times and it would appear to form the basis for the authors long-term investment strategies. What I didn't particularly like was the chapter on baseball results and long-term market trends. I am sure there is a correlation, but even the statistical approach can be taken to extremes.
This book will not tell you what to invest in - the occasional exception being permitted - but it is in any case a must read. If you are in the market, you should learn quite a few factors to aid your strategy.
The fact that VN has improved on his writing style is a definite plus.