Tuesday began the Clash of the Titans.


(GOOG) - Get Report

, the 7-year-old upstart that has become king of the hill of Internet media and technology and the entire stock market, has been sued by


(MSFT) - Get Report


The reason: A little-known executive quit Microsoft instead of returning from his vacation and announced he was going to Google. Microsoft claims it has a noncompete agreement with the executive that prevents him from working for a competitor for one year.

The executive, Kai-Fu Lee, is leaving his position as vice president of speech, search and language understanding, to take a position with Google as head of its new China group. Microsoft says that Lee has been privy to Microsoft's future search strategy, and it doesn't want this knowledge in the hands of Google.

Lee has quietly been a driving force throughout Silicon Valley in the area of speech recognition. He was at


(AAPL) - Get Report

for six years heading its speech recognition technology in the 1990s. Then after a brief foray at

Silicon Graphics


, he moved to Microsoft in 1998 and basically commandeered its speech technology. More recently, he's been involved in search.

I'm writing this because Lee had a big effect on my trading and my career. In 1989, I was trying to decide what graduate school in computer science to attend. I flew to Pittsburgh to check out Carnegie Mellon, where Lee was a research associate and a newly minted Ph.D.

I wanted to meet him specifically because of a 1988 paper he wrote, "A Pattern Classification Approach to Evaluation Function Learning," which described his successful attempt at creating a world champion Othello program. His program defeated the reigning champion in 1988.

When I met him, he told me he had been getting blocked on his grad-school research in speech recognition, so he took a year off to write the Othello program. Then he considered doing a similar program for the game Go, thought it too difficult, and eventually finished his Ph.D. in speech recognition, fortunately for speech-recognition users everywhere.

Practical Applications

What does this have to do with trading? Here's how his Othello program worked. He compiled a database of thousands of winning positions. For each winning position, he would label it with a vector of variables. Among the variables were how many corners you controlled, how many squares in the center, etc.

Then, given a new random position, he used software (similar to his later speech-recognition software) to determine how close the random position (as identified by its vector of position variables) was to a winning vector. At every level, the software would chose the move that would bring it to a position that was most closely matched (statistically) with a vector from a winning position.

Years later, after failing to apply his techniques to chess and Go, I started trading on the basis of looking at prior days in the market ("the current position") identifying the key variables (four down days in a row, option expiration day, etc.) and determining whether there was a statistically significant event that has resulted after past occurrences of the pattern. I've written about this before on


and described some of the patterns in my book,

Trade Like a Hedge Fund


In any case, it's interesting to see a talent like Kai-Fu Lee really blaze through all the tech titans during his career, and I hope this issue gets resolved quickly so we can observe the next iteration in his success.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Silicon Graphics to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund


Trade Like Warren Buffett. At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

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