I Am My Own Worst Enemy

When it comes to selecting investments or any financial decision, we are often our own worst enemy. Over 15 years ago I became interested in certain aspects of the consciousness and the human mind. There were at least 3 roots to this inquiry, one personal, certain observations made during my practice of Tai Chi as a martial art, and the discovery in the Wall Street Journal (of all places) the U.S. military and intelligence community were using psychics to spy on the Russians. This search culminated in taking the Certified Hypnotherapist training offered by the National Guild of Hypnotists. Among other things, I have concluded human senses and consciousness are, at best, treacherous and often inadequate tools for the study of truth. The mental maps we use in our perception of reality, no matter how detailed and accurate, are not and never can be the territory they represent.

Having worked in a research laboratory for 25 years, I know that the participants in an experiment affect the outcome of that experiment. They design the experiment itself, select the instrumentation, the method of recording the data, they are participants in the experiment as they execute the experiment, and they choose how to present the outcome of the experiment. All these factors affect the accuracy and repeatability of the results. I can not say an iron bar weighs 100 pounds. I can say that the bar weighs 100 pounds plus or minus 0.1 pounds with a statistical confidence of 99.6%. There are more subtle problems found in experimental methods. For example, using the same data to both postulate a theory and validate that theory is a trap I have seen all too often.

We are over optimistic concerning our own abilities. Studies have indicated that about 80% of students predict they will perform in the top half of their class. Roughly one half of all high school football players believe they have a legitimate chance for a NFL career. In fact only 1 out of 3,000 college football players ever make it to the pros. I don’t expect to consistently beat the market, but I do believe that my decision making ability is better than the norm. If I didn’t, I would just buy index funds. Many serious men, such as Warren Buffett, recommend this plan for those of us who are part time investors.

If you have watched Sleepless in Seattle, you know we men like to quote the Godfather. In a conversation with his son, Michael, the aging ill Don Vito Corleone observes, “I spent my whole life trying not to be careless. Women and children can afford to be careless, but not men.” I too have spent my life trying not to be careless. I know that psychologists have demonstrated that the quality of a man’s judgments peak at about age 55. Then they decline. Have I started down that hill? Would I know if this were the truth?

Crowd psychology is a part of stock market performance. Benjamin Graham’s, Mr. Market is a most erratic irrational fellow. One day, sometime for no reason whatsoever, Mr. Market will sell a stock for 15% less than he paid for it yesterday or he is just as likely to pay 15% more for no particular good reason. Mr. Market becomes wildly optimistic just as a market is about to reach its peak (think of the Internet bubble). He is just as likely to sell everything in a fit of pessimism, just when the market has reached a bottom. That is the time he should be buying everything is sight. Sometimes this is called Buffett’s Rearview Mirror, a tendency to become irrationally optimistic at the end of a long bull market and irrationally pessimistic when a bear market ends in a crash.

Another all too human folly is termed Conservatism Bias and Confirmatory Bias. Because of my opinions I am likely to undervalue or ignore stocks that do not pay a dividend, missing out on opportunities like Apple or Google (Conservatism Bias). Because I believe in value investing and the importance of a sustainable dividend, I tend to seek out information that supports my prejudice.

Because outcome tends to reinforce our decision making process, we can learn the wrong lessons. We tend to congratulate ourselves on bad decisions that turn out well, such as purchasing a winning lottery ticket. I hear this from time to time from unhappy souls who have spent $1,000 to win $20 from a scratch off lottery ticket. Of course wise decisions can turn out badly. If a doctor misdiagnoses an illness, does that indicate I should never again visit a doctor?

We all know about Monday morning quarterbacks. Every Monday morning, along with my coworkers, we discuss the mistakes made over the weekend by our favorite teams. We know what plays the coaches should have called. Why aren’t they as smart as we are? Everyone knows that an Internet stock with no cash flow, no profits, and no price earning ratio that is capitalized at a value that exceeds the Gross National Product of Germany is going to become a great crashing disaster, but only after the fact. While the music is playing, everyone wants to dance.

Finally, we come to language. In both undergraduate linguistics and in studying artificial intelligence in graduate school, I have run into philosophical discussions of the inherent limitations of language in creating a net of meaning. The very words I use in writing this article are inherently imperfect and limiting.

And please, let’s be careful out there today.