Most of us enter the investment business for the same sanity-destroying reasons that a woman becomes a prostitute. It avoids the menace of hard work, is a group activity that requires little in the way of intellect, and is a practical means of making money for those with no special talent for anything else. -- Richard Ney (as quoted on page 231)While this book isn't a perfect fit for a site like this, it does have a scientific thread that runs through its core. The subtitle is a long one--How A Band of Maverick Physicists Used Chaos Theory to Trade Their Way to a Fortune on Wall Street. That pretty much sums up the entire plot except that computer science, statistics, and financial trend analysis seem to be used far more than chaos theory. While the above quote is true of many, the architects of the company prove that to do well in the investment business you frequently need to work hard and have a keen intellect.
The Predictors is the story of the idea behind, the formation of, and the eventual success of Prediction Company. Along the way the reader is allowed to peek into the lives of not only the founders of the company but a wide variety of interesting characters on Wall Street who are sought out as potential backers and funders of the new start up. I found the early portions of the book to be, by far, the most interesting. A big part of the reason is the quirkiness of these characters and the incredible paths they traveled to their successes. For about the first half I had trouble putting The Predictors down. It is a real page turner during this stretch. I even read by lantern light while camping!
The second half wasn't nearly as engrossing. There were few surprises and the general tone became somewhat dull. Because of this, I wasn't too sad to see the last page come and go.
The accomplishment of this company, assuming the author doesn't overstate the actual case, is the dream of many. Is it possible to create a consistently winning system that can predict the market? The very general methods used are given but, as you would expect, not nearly enough or in enough detail for any real secrets to be leaked or copied easily.
The Predictors isn't for everyone, but if you are a player in the financial markets and/or like to read generally well-told, true stories then it is likely for you. Also, if you are from Santa Fe or interested in the area then the geographical and cultural dialogue alone may make it worth your reading.
from the publisher:
The idea of using chaos theory as a predictive tool had long intrigued the Chaos Cabal. They asked themselves, what nearby phenomena look random but actually contain hidden structure? the smoke curling up from an ashtray? the vortex formed around a sugar cube dropped in a cup of coffee? the stock data listed in the newspaper lying on the table?
In this deceptively simple question lay the roots of a great adventure in the world of money, an antic, frantic odyssey into a universe defined by the mystical convergence of physics and finance.
It never dawned on Doyne Farmer and Norman Packard--not when growing up together in the Southwest, not during their hippie grad-school days, not even when applying their collective genius in physics and mathematics to winning at roulette in Las Vegas--that someday they would end up as players, beating the Masters of the Universe from Morgan Stanley and Goldman Sachs at their own game. But of course it's only natural that these accomplished theorists, counted among the founders of the new science of chaos, would eventually turn their attention to what may be the most uncontrolled and chaotic phenomena of all--the global financial markets.
The Predictors is Thomas Bass's engrossing and often hilarious chronicle of how these two scientists--along with their team of T-shirted and ponytailed Ph.D.'s, and with the help of some very savvy financial gurus-attempted to decode and model the complex patterns underlying the apparently random movements of commodities, currency, and equities markets. On the dizzying ride from the Prediction Company's dusty offices above a Santa Fe fortune-teller to the glittering towers of Wall Street, Farmer and Packard find themselves in the company of virtually every cowboy trader and rogue millionaire who ever tackled the market. Bass brilliantly spins a tale of genius and greed, power brokers and rebels, all the while providing a brisk education in chaos, complexity, and the world financial markets.
For anyone who has ever dreamed of finding a way to outguess the wizards of Wall Street,
The Predictors will be a ride as thrilling as a big market surge.
Thomas Bass is the author of The Eudaemonic Pie--the chronicle of Farmer's and Packard's assault on the casinos of Las Vegas--and several other books. He writes for The New Yorker, Wired, and other magazines. He lives in upstate New York.
The following is an excerpt from the book: The Predictors: How A Band of Maverick Physicists Used Chaos Theory to Trade Their Way to a Fortune on Wall Street by Thomas A. Bass
Published by Henry Holt; 0805057560: $26.00US; Oct. 99
Copyright © 1999 Thomas Bass
I want to ride to the ridge where the West commences,
Gaze at the moon till I lose my senses,
Can't look at hobbles and I can't stand fences,
Don't fence me in.
All hell has broken loose in the Chicago exchanges. A speculative tsunami from somewhere in Asia has washed over the gold market in Zurich before crashing into the pits at the Mercantile Exchange. Hundreds of men and a handful of women, packed hip to butt in raked arenas, are yelling at one another and waving upraised hands, palms out, in a desperate bid to dump Eurodollars. The market is gapping downward faster than orders can get filled. The exchange computers have exploded. The three-story light board surrounding the pits is no longer tracking the action. The traders in bright red and yellow jackets look like life-vested sailors shouting to be saved from a churning market that is about to swamp them.
This is not a number day, when Commerce takes the temperature of the economy. This is not a triple witching hour when quarterly contracts expire. Neither the scalpers betting their own money nor the floor brokers trading corporate accounts had guessed that a tidal wave of sell orders would build all night through Asia and Europe before flooding into Chicago. Clinging to their bleachers, with a sea of trading cards rising at their feet, the Merc's red-faced traders are scrambling to get clear of a foreign exchange market so big that by the end of the day more than a trillion dollars will have changed hands.
To the uproar of shouting traders is added the sound of sirens going off every fifteen minutes and the booming of loudspeakers calling out incomprehensible messages. Surrounding the pits is a huddle of clerks running orders back to the thousand trading stations that overlook the floor. Here wire clerks, outfitted with multiple telephones draped around their necks, are doing their own agitated dance through the day's incoming orders. Surveying the scene from metal parapets suspended over the pits are the blue-coated officials who keyboard every wink and nod into an electronic ticker tape that flashes the numbers up on the wall and out from there to the four hundred thousand computer screens on which the world's financial traders are following the action on this eighth day of April 1996.
The price of admission for standing room in a Merc pit is half a million dollars. There are many ways to play the game, but really only two kinds of players. Speculators and hedgers. Those scalping profits from churning markets, and those seeking shelter from the storm. Ninety-seven percent of the daily churn in the financial markets is generated by speculators. This is the official figure, published by the Merc, which defends speculators as necessary for keeping the markets "deep and liquid." Speculators stir the pits and hedgers pump them with funds, and between the two of them one gets the feeding frenzy known as the world financial markets.
The open outcry system, where every broker is his or her own auctioneer and every price is discovered by yelling it to the world, is turning today into a mad howl of sellers searching for buyers. The sell virus has jumped from foreign exchange to interest rates and out from there to all the commodities that will cost more when the price of money goes up. Everyone is shouting and gesticulating. Palm out, sell! Palm in, buy! Fingers near the face indicate quantity. Fingers to the side of the body indicate price. Upright fingers count one through five. Horizontal fingers count six through nine. Single digits are counted on the chin. Tens are counted on the forehead. A "fill or kill" order looks like someone shooting himself in the temple. "Sell two thousand" is the horns of a cuckold.
Traders keep flashing check marks above their heads to verify the price at which their orders are being filled, and everywhere brokers are tugging their earlobes--the sign to fill an order no matter what the price. They are desperate to get a broker across the pit to give them a salute from the nose, meaning their order has been executed. All morning the shouts go out for ten lots, thousand lots, a lot being a futures contract that can cost up to 5 million dollars. Scalpers flap their hands, trying to attract butterfly spreads, or put their hands to their throats, searching for strangles. They keep patting themselves on top of the head, asking, "What size is the market?" They pump their elbows to signal market orders, limit orders, and canceled limit orders, which look like someone cutting his throat.
Big men in steel-toed shoes, who will lose their voices and retreat to the back office before they are forty, are jammed together so closely that they can tell what their neighbors ate for breakfast. They pull their jackets over their heads when someone farts. They goose one another after a good trade. They hurl catcalls at women being trained as runners. This is a hard-drinking, high-cholesterol crowd, barely graduated from toga parties, who today are flushing Eurodollars down the drain and betting hard against the United States Treasury. The joke in Chicago is that these people, if they weren't running the world financial markets, would be driving taxis.
Two thousand miles away, down by the railroad yard in Santa Fe, New Mexico, sits an old Coca-Cola warehouse. Occupying the ground floor are a used-furniture dealer and a shop selling crystal balls and spiritual advice. The second floor, refurbished with sand-colored stucco walls and track lighting, holds a kitchen and bathroom, five former bedrooms converted to offices, and a central, sunlit space, from which rises a staircase leading to a rooftop gazebo. The big room is filled with hanging plants, a couch, a table, and a couple of computer terminals. The screens are glowing with the green sawtooth lines of financial markets ticking up, down, up, down.
Climbing the warehouse stairs, after eating lunch across the street at the Zia Diner, are a dozen men and women in sandals and shorts and T-shirts decorated with bespectacled banana slugs and Leonardo da Vinci's design for the first bicycle. Except for the stout Dave DeMers, who is bringing up the rear like Falstaff, and the wiry William, who is nut-brown from spending so many spring days in his kayak, the men are tall and lean. Equally fit are the two women among them, who are also dressed in shorts and sandals. Clara, the Bemese mountain dog who has one brown and one blue eye, bounds upstairs, swishes her tail, and gives a hearty woof!
"One woof means we're winning!" Doyne mugs, giving the dog a rub behind the ear. "Let's go see how you're doing."
He opens the door and crosses the room. The blinking computers tell him at a glance that Clara was right. All morning the machines have been selling short, dumping shares in markets predicted to fall.
"Not bad," says Norman, smiling at the day's winnings, which are tallied on the computer screen in front of them. "That was a million-dollar lunch."
"This calls for some celebrating," announces DeMers, who riffles through the soda cans and leftover birthday cake in the refrigerator to produce a bottle of champagne.
Beep! sings the computer, making its final trade for the day.
Later in the afternoon, they grab the champagne and head upstairs to their rooftop lookout. Below them lie the red adobe houses of Santa Fe, over which hangs a leafy gauze of cottonwoods and willows. Off to the east rise the snow-covered peaks of the Sangre de Cristo--Blood of Christ--mountains. Falling away to the west are the layer-cake mesas of the Rio Grande valley. The air is tangy with the smell of burning piñon. The setting sun is raking the desert into a fierce display of umbers and ochres, as a crescent moon rises in a cloudless sky. It is a good day to be alive. A good day to have an extra million dollars in your pocket.
For big players in the world financial markets, who often burn the midnight oil, they took pleasantly relaxed. No one is going to follow the Asian markets over the weekend or worry about Mondays opening prices. While their automated system hums along on its own, Sonia is going to climb Santa Fe Baldy; William is going to kayak the Rio Grande Gorge; Doyne is going to ride his new mountain bike up Glorieta Mesa; Norman and his family will hunt for mushrooms behind Los Alamos; and Karen will plant her garden.
"Who knows, maybe we've finally cracked the problem," says Doyne, turning to Norman, who is stretched out beside him on a lounge chair. "In any case, it sure beats losing," he says with a grin on his face.
Norman raises his glass. "To our next million," he says.
Copyright © 1999 Thomas Bass