Lizards, rats & the investor's primitive brain
Yes, you heard right: Your brain is handicapped, a saboteur costing you
big money. In "Mean Markets & Lizard Brains," former Goldman trader
Terry Burnham says our primitive brain was designed to help our
ancestors hunt for food, daily survival stuff.
But "by its very nature, investing requires us to be forward-looking,
to anticipate events. Our lizard brains, however, are designed to look
backward. Thus, the lizard brain causes us to be optimistic at market
peaks (after rises) and to be pessimistic at market bottoms (after
falls)." So whether it's optimism or pessimism, greed or fear, emotions
do our trading, not reasoning.
Folks, our brains are our own worst enemies. Here's Burnham's summary:
"We need to precisely restrain our instincts in order to make money.
Unlike neutral games of chance, or ancestral problems like gathering
and hunting, financial success means suppressing our 'gut' instincts."
Here are his eight rules to restrain this saboteur.
1. Don't trade emotionally, unless you're Tom Cruise
Actually, he's referring to Tom's role as Maverick in the film, "Top Gun." Movies keep our myths alive. In fantasies we cheer the superiority of our gut instincts as the hero shoots down enemy jets, winning a great battle in the final scenes. But c'mon folks, get real, it's just a movie. In real life Tom is just little irrational Tommy jumping on Oprah's couch. So when you're on Dalal Street's couch: "Trade as little as possible."2. Never trust anyone, not even yourself
The rest of Burnham's warnings all emphasize this "new science of irrationality." You never trade impulsively on tips, from your barber, best friend, broker or your lizard brain: "Always include a significant delay between an investment idea and an actual trade.
3. Losers average losers
Remember: "Even great and experienced traders must fight the impulse to hang onto and average into losers." Get out. The lizard brain hates losing, hangs on and loses (again).
4. Do not dollar cost average
This rule applies to trading individual stocks. Less so when adding to a diversified portfolio as part of a regular savings program. But traders listen up: "While dollar-cost averaging works in bull markets, it is not profitable in long-term declines."
5. Do not open your mutual fund statements
Actually Terry's talking about turning off cable TV, ignoring all news. By the time you get the news, it's too late, there's no trading value. Worse yet, your lizard-rat brain will make the mistake of reading something into random news, compounding your mistakes.
6. Spin control for yourself
Translation: Lizards and rats hate to lose, but since they can't focus
on the big picture or the future, they're destined to lose anyway.
They're accident-prone when it comes to investing. Solution: Focus on
your overall portfolio, and don't tinker with it.
7. When to go all in
Translation: Remember "The Gambler" song, by Kenny Rogers: "You gotta know when to hold 'em, when to fold 'em." You also gotta know when to go "all in" (bet everything). Which is rarely. But the hyperactive rat-lizard brain still does it. Unfortunately, when you're in the Wall Street casino, fighting to survive against thousands of professional rats, lizards and other hostile animals who want to pick the meat off your carcass every day ... maybe you ought not be in that casino.
Their primitive brains are convinced that with the right tips they'll go "all-in" and finally beat The Street's best-and-the-brightest rodents and reptiles. So they tune me out, convinced I couldn't possible understand their unique brand of instinctual "Maverick" genius.So they'll continue jumping up and down on Oprah's couch like an irrational child (metaphorically, of course), proving again and again that the investor's primitive brain really is a saboteur.
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