Minding the Mind

Some people would sell out for nearly nothing and move away.
And it never failed that during the dry years the people forgot about the rich years,
and during the wet years they lost all memory of the dry years.
It was always that way.

John Steinbeck,
East of Eden

The year was 1980 and I called a client to recommend she buy United States ten year Treasury bonds yielding eight percent. “Are they safe,” she said? “Yes, Ma’am, these bonds are guaranteed by the full faith and credit of the United States,” I replied. She paused for a bit. Then she said, “But are they REALLY safe?” This was a cautious woman.

And she was far from alone. Fourteen years of bad markets played havoc with most investors’ psyches. Stocks had crashed, inflation was roaring, and social mood was as pessimistic as it had been since the thirties. The irony of it was that the massive liquidation of stocks during the seventies had made the market the buy of a generation. The Dow Jones Industrial Average was selling for six time earnings, bore a yield of 7% and was priced at book value–a rare circumstance. The best recommendation I could have made was that she buy blue chip stocks, but I knew she would have none of it.

Fifteen years later, my retiree clients were pissed at me for not getting them into tech stocks. By now, the market had gone up a thousand percent and my cautious, fearful clients had morphed into riverboat gamblers. Philosopher/trader, F.J. Chu is right: The history of the market is the history of forgetting.

It’s the elephant’s fault that, when it comes to investing, we will be wrong at major turns. The elephant being the Buddha’s name for the emotional side of our divided brain. In matters of uncertainty, the emotional brain is conditioned by its experience. At the top of a bull market, the elephant is bullish in the extreme and cannot be kept out of the market. A fully invested person today may listen to a bearish argument, and even nod his head in agreement. But he is not about to sell out.

The Buddha described his divided brain as the rational brain being the rider, and the emotional being the elephant. He said, “I, the rider, can go anywhere I want–as long as the elephant wants to go there, too!”

The average investor’s elephant is ensconced in the bullish camp today. As the market starts down, the experience of seeing her account statement decline will erode this bullishness, and the bearish case will begin to cause her the anguish of Ovid’s Medea, torn between her love for Jason and her duty to her father. She laments: I am dragged along by a strange new force. Desire and reason are pulling in different directions. I see the right way and approve it, but follow the wrong.

Loss, probably quite severe, will change the elephant’s view. And when the market hits bottom, instead of getting in, the elephant will see the right  way and approve it, but follow the wrong and stay the hell out. I wish it were otherwise.



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