In the case of the lines, the correct answer is obvious. In the case of investments, the correct view is rarely so evident. Consider again the situation of Etoys versus Toys R Us. While it appears obvious in retrospect that Etoys would go bankrupt, imagine the pressure to conform. Day after bubble day, people (many of them professionals) bought the stock at high valuations. In such cases, our brains seem built to start believing what others are saying.

To do well, an investor has to purchase exactly that which is unloved. This requires an ability to take the emotional pain of being different. I recall my brokers mocking laugh when I placed an order to buy Treasury bonds in early 2000. Bonds had been going down consistently and all the smart money, he said, was selling not buying.

Unlike my Detroit Lions story, the bond story has a happy ending. As usual, the common consensus was wrong, and the bonds that I bought soon increased in value. The successful path was the path that was scorned.

An Instinct for Losing Money

A cartoon I saw posted over a traders desk on Wall Street read, Definition of a quandary: Should I sit back and watch the market soar or buy now and cause it to plummet?

In some areas our natural tendencies take us to good outcomes. My wifes recent pregnancy comes to mind as one such area. During the early part of pregnancy, the growing fetus is especially sensitive to certain naturally occurring toxins.

According to Margie Profet, who won a MacArthur Foundation genius award for her work on this subject, pregnant women are built to avoid foods that include fetus-damaging toxins (teratogens).23 She provides evidence that pregnant women are nauseated by such foods, particularly cabbage-family vegetables like broccoli and cauliflower that have high levels of damaging compounds. If Profet is correct, then in the area

of food choice, pregnant women ought to follow their instincts and eat whatever tastes good.

When it comes to investing, the message is exactly reversed. The trades that feel good tend to lead to losses. For example, my older sister Sue recently sent me an e-mail saying, I have gone crazy buying stocks! ... No informed rationale for purchases, just a feeling. Reminds me of the slots at Vegas! Sues lizard brain was screaming at her to buy.

After almost a year of watching the market rally with only a small ownership in stocks, sister Sue was fed up. It was time for her to get in on the gravy train. Unfortunately, this impulsive purchase was timed for losses. In fact, within a few weeks of the e-mail, the stock market had its biggest decline in a year.

My buddy Doug had a similar experience recently. Doug appears in a few chapters of this book and has had excellent results overall (in the stocks chapter, you can read about the day he earned $500,000 in an afternoon of surfing). In early 2002, Doug did some careful analysis of a few firms that he knew well. He decided to buy some Nortel stock at around $1 a share. This turned out to be a great purchase as the stock went up steadily.

In the months after Dougs purchase of Nortel, I heard not a single peep from him about his successful investment. Then one day, the following note arrived with the subject line of a little bragging. It read, I was pushing Nortel big back at around $1. Well Nortel is over $8 today; up $1. Call me Warren :-)

After months of watching Nortel stock climb, Dougs lizard brain made him send this e-mail at this particular moment. A Wall Street cliche is that nobody rings a bell when its time to sell, but this bragging e-mail was a perfect time to sell. Within a short period after the e-mail, Nortels stock returned to $3, going down even faster than it had risen.

The message is that unfettered emotions are not the investors friend. Dougs decision to buy was driven by analysis in his prefrontal cortex, his decision to gloat, by his lizard brain.

A recent study documented the physiological reaction that people

have to market information. Professor Andrew Lo and Dmitry Repin wired up a group of professional traders.24 With a setup not too different from a heart stress test, these MIT researchers were able to measure minute changes in body temperature, skin conductance, and a host of other variables. The traders they wired were trading real money for an investment firm.

What happened to our wired traders when news broke? Lo and Repin report two interesting findings. First, all the traders-even the most experienced-had measurable emotional responses to news. Second, the more experienced traders had weaker emotional responses than their less-experienced colleagues.

These physiological responses may help us understand mean markets. When people see stock price changes or read about world events, we have physiological responses. If we act on those emotions, we tend to make precisely the wrong moves. In other words, we need to shackle the lizard brain in order to make money.

To be successful we have to damp down our emotional response (toward the lower response of the experienced professional traders in the MIT study) or we need to prevent our emotional reactions from impoverishing us. The timeless tips of Chapter 10 focus on ways to shackle the impulsive and unprofitable lizard brain trader who lurks inside us.

A Guide for Bubble Hunting

As the title would suggest, the Incredible Shrinking Man portrays the life of a person as he goes from normal size to tiny. As the protagonist continues to shrink he faces danger from a house cat and-when even smaller-from a spider. Eventually our hero realizes he cannot cower indefinitely. He confronts the spider, and even though the beast is much larger than the shrunken man, he kills it with a pin. After this victory, the movie ends as our hero prepares to leave his former house with a cocky walk and a blood-covered weapon slung over his shoulder.