377 – Roy Niederhoffer: Trading Against Your Instincts: How to Make Money in The Market

“I have a lot to say about the crypto market,” Roy Niederhoffer said.

His brother used to be my boss.

That was 16 years ago. When I was a hedge fund manager.

Ten years before that, Roy worked for his brother, too. And he became a much bigger success than me. He built a billion dollar hedge fund.

And now, he’s a super investor.

He knows the history of markets, he knows what’s changed, and he knows what to track. So I had to have him on my podcast to tell me his strategies.

And how he built his wealth.

I’ll tell you what I learned.

But first, you have to understand just how smart Roy Niederhoffer really is.

Roy was making a six-figure salary… as a teenager. In 1979.

That means, he started his first business when he was only 13 years old.

He raised venture capital from his teachers.

He charged $25 a share. And raised $2,000 to start the business. It was a computer programming company. They made video games. And within a couple years he had about 30 employees.

“I used that money to put myself through college,” he said.

He studied neuroscience at Harvard. And graduated Magna Cum Laude.

“Why did you decide to go into the investing business?”

It seemed odd because his college thesis was about music and the electrical activity in your brain.

He told me why he switched careers from neuroscientists to investor. It had to do with a woman.

“Can I tell a story?” he said.

“Yeah, please.”

“There was a girl who lived across the hall from me. She was very beautiful and she sat next to me at a concert of Beethoven’s 9th symphony. I turned to her and said, ‘Have you heard this before? Live?’ And then she said, ‘Well I don’t think I’ve heard this at all.’”

Roy said that just stuck with him.

He thought, “What was her experience hearing maybe the greatest piece of music ever written for the first time, live in Symphony Hall?”

He ended up doing my thesis on that. “And I was all set to do that for a career…”

“As an academic?”

“Yeah, I applied to Cambridge, I got in, I was going to make a demo project of a musical instrument that you can control directly with your brain.”

“So what changed your mind?”

“I got admitted to Cambridge, but they didn’t fund the project.”

So he had a choice.

Roy would either go into debt and do his research project OR accept a job offer from his brother (Victor Niederhoffer) as a trader.

He took Victor’s offer.

Three weeks later, the markets crashed worldwide.

It was October 19, 1987.

Black Monday.

“I watched the most successful guy I’d ever met go bankrupt in the morning and then have the best day of his career from 3pm to 4:30 so…”

“Wait,” I said. “Let’s address that.”

If that had happened to me, if I saw all my wealth and the wealth of the world collapsing around me in real time, I would have sold everything. I’d get out of the market as quickly as possible.

And lose it all. And then watch it go up again from the sidelines.

I’d be the biggest loser.

So this is where Roy started to teach me.

When it comes to trading, “instincts” is just bad information.

He said, “Typically when markets are very volatile that’s when people trade instinctively and not rationally. It all ties into my neuroscience years at Harvard. The things I learned there suddenly started to reappear in our trading strategy.

I asked him about his systems.

And he said, “There’s a lot going on, but essentially, the idea is that market movements will trigger cognitive biases in the participants.”

He gave some examples of these cognitive biases:

  • “Things like the consensus bias (i.e. wanting to do what everyone around you is doing)”
  • “Or loss-aversion, which is a popular position people have when someone loses a lot of money very quickly. It’s painful because we all hate to lose more than we love to win”

And then he explained his trading strategy:

“We try to create rules that are based on well-known cognitive biases shown in many many aspects of human behavior and trading. So what our strategy tends to do its best in are periods of time when people are a subject to these biases… when people fall prey to instinctive behavior, i.e. when they’re experiencing high levels of emotion.”

And today, everything is emotional. The president is emotional. The media is emotional. And we’re all watching. And the market is responding.

So Roy looks at your emotions + the market and trades against his instincts.

The idea is that irrational behavior eventually leads to rational behavior. And Roy’s strategy is to model that behavior.

And he does this across all markets. “The idea is that these are universal human factors. Not just something that’s true about the bond market or soybeans.”

“Can you say an interesting strategy?” I asked.

“I can, but then we’d have to shut the mic off.”

“Ok, well, let me ask you this. What’s your stance on crypto?”

He started giving me a history lesson. “Don’t worry this is going to come back to crypto,” he said.

He told me about the history of governments devaluing money.

“I remember I was in Zimbabwe in 2007 and I got hundred-trillion dollar bills as change for my lunch.”

This is why we need crypto.

Crypto has a fixed supply. The dollar doesn’t. And the government has reasons to print more. Which would devalue it.

“The vice of governments is to print money,” Roy said. “And I believe that we have about $120 trillion dollars worth or promises to our people that we don’t have.” Those “promises” are social security, medicare and Medicaid.

“I believe the US government is going to print money to meet those obligations.”

Historically, when money is devalued, nations become endangered (and possibly extinct):

Example 1: The Roman Empire

Year zero (0), one “denarius” could buy a soldier a couple drinks. “Fast forward 240 years later, the same denarius had .05% silver. They devalued it by 99.95%”

This was the Roman Empire’s version of the Fed printing money. They decreased the amount of silver in each denarius.  “And, as we speak, we see this in Venezuela and in Iran it’s happening.”

“Do you think the Roman Empire wouldn’t have fallen if they didn’t devalue the money?” I asked.

“I’m not a classist, but I’d certainly make that bet ,” Roy said.  “Governments always reduce the value. Except if the supply is fixed. The reason bitcoin is different from any other money that’s ever been created is because it has a financial echo system associated with it as robust and powerful as a fiat currency.”

Example 2: The U.S.

It’s the year 1900.

You’re in New York City and going on a date. Back then everyone went to Oyster bars. There were hundreds of them.

“You could get all the oysters you could eat. And they were big oysters, the size of a dinner plate. Plus all the beer you could drink for 5 cents. If you could fine that today it might be $100.”

That’s 120-year difference and a devaluation of 99.9%. “in oyster terms.”

Roy discovered crypto in 2011 and says, “This is the solution to the great vice of fiat currencies and even asset backed currencies like the denarius in Rome.”

The question becomes who do you trust. Government or software?

Who’s less emotional?


We spent the last 20 or 30 minutes talking about crypto.

And I could go on and on about everything he taught me. But I came to one main conclusion…

If you’re diversified in your life, that buffers the misery. And that’s probably why I don’t run a hedge fund anymore.

It was too emotional. I was too instinctual.

Now… I can bet against my instincts in everything I do.


Also Mentioned

Monroe Trout

Toby Cravel

Paul Jones

Space Invaders video game



Ms. Pac-Man

Scott Adams

Beethovens’ Symphony No. 5 

Daniel Kahneman author of “Thinking Fast and Slow

The Blank Slate” by Steven Pinker

Joseph Stiglitz

Antifragile” by Nassim Taleb

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