Sunday, July 24, 2005

Summer Stroll # 14 -- Out of Your Mind, Not Out of Your Head

This past week the Wall Street Journal reported the findings of a study from the field of neuropyschology. Researchers at Carnegie Mellon, Stanford, and the University of Iowa reported in the journal "Psychological Science" that a certain kind of brain-damaged person makes better investment decisions that a control group. "The 15 brain-damaged participants that were the focus of the study had normal IQs, and the areas of their brains responsible for logic and cognitive reasoning were intact. But they had lesions in the region of the brain that controls emotions, which inhibited their ability to experience basic feelings such as fear or anxiety. The lesions were due to a range of causes, including stroke and disease, but they impaired the participants' emotional functioning in a similar manner. The study suggests the participants' lack of emotional responsiveness actually gave them an advantage when they played a simple investment game. The emotionally impaired players were more willing to take gambles that had high payoffs because they lacked fear. Players with undamaged brain wiring, however, were more cautious and reactive during the game, and wound up with less money at the end." While the researchers admitted that more investigations were needed before a definitive conclusion could be made, I believe the finding are in keeping with the two articles I wrote on My 28, and June 2, entitled "The Adversary." In those articles I stated that investment decisions made out of greed or fear, were doomed to failure. To make matters worse, the financial media is in the business of endgendering greed and fear. Thus, to get your head straight, so to speak, and improve your odds of making decisions from your reasoning mind, instead of "out of your mind," it is imperative that you have a valuation tool. A valuation tool that is simple and intuitive. A speedometer or barometer of sorts, that will give you an honest reading on the investment values of the day. I have studied this matter for nearly 20 years, and I believe that tool should be the dividend. There is an illusion in the land. It is the illusion that the market is always right. Academia proclaims it. Wall Street preaches it. The media contorts and confuses it. I talk to too many people every day, who are betting on the news with everything they've got. They always want to keep their powder dry when uncertainties push the market down; they can't resist charging ahead when prices are spiking higher. They know they ought to do the opposite of what they feel, but they seem incapable of getting beyond their feelings and getting on the right side of the ups and downs of the market. They think that every new terrorist attack or bad earnings report or Fed rate hike is the beginning of disaster. They believe that a "60 Minutes" expose on the "evils" of a company they own will destroy the company; they believe every tout that CNBC makes is a sure winner. They are wrong. They are wrong. They are wrong. But few really learn from their mistakes because few understand that it is precisely their "feelings" that is blinding them to the reality of the situation. The media is in the entertainment business, nothing more, nothing less. No one ever became truly successful by following the medias' picks and pans. The only time I read the Wall Street Journal is on my vacation. It's for fun. If I am correct, even remotely, you must get busy and find your barometer, your speedometer, or your weathervane; whatever you are going to use to measure the actual weather of the day. And you must test this measure of investment value over time against your own gut feels. Few people I know who have adopted the value-investing approach are whip sawed by the market. I know what you are thinking, but you can't go there either. Buying a bunch of mutual funds to gains someone else's valuation tools can be just as fraught with fear and greed as doing it on your own. What fund are you going to buy? Well of course you'll buy one with a good track record. But that methodology has been studied ad nauseum, and it has been found wanting. Yesterday's winners are not necessarily tomorrow's winners. As Mike Hull, our president says, "Every day more people with more money than at anytime in history are retiring, who must earn their retirement wage out of a finite body of capital for as long as 30-40 years." The job can be done. It can be done for most people safely and surely. But for those who are trying to feel their way along, who trust every Wall Street claim, who recoil at every media sniping attack or dose of bad news, they will begin and end everyday of with the same question: What next? On the contrary, those who know value will look to be buying when people are most pessimistic and be selling when everyone is bullish. To be continued.