chapter ten

TIMELESS ADVICE How to Shackle the Lizard Brain

Timeless and Timely Tips

In The Graduate, a young Dustin Hoffman (playing the role of Benjamin Braddock) receives some succinct, and unsolicited, career advice from a friend of his parents, Mr. McGuire:

I just want to say one word to you... just one word. -McGuire

Yes, sir. -Ben

Are you listening? -McGuire

Yes, sir. I am. -Ben

Plastics. -McGuire

I dont know if plastics was a good career choice in 1967 when The Graduate was released. I am sure, however, that there are better and worse times to work in particular fields. Similarly, the Mean Markets view is that there are good times and bad times to make particular

investments. Gold, for example, was a great investment in the 1970s, and was a terrible investment in the 1980s and 1990s.

If markets were rational, then investing would be easy and stress-free. In the fairytale land of the efficient markets hypothesis, all investments are correctly priced at all times. Thus, in a hypothetical, rational investing world, it never pays to fret about possible mistakes; nor does it pay to seek bargains.

Out in the real world, however, markets are irrational and often mean. This creates both opportunity and risk. In a world where prices are often too low or too high, investors can find insanely good deals. We can also make insanely bad deals. Since the invisible hand has not built a world that is going to ensure our financial success, we have to do it ourselves.

Thus, the key to investing success-in the real world-is to be on the correct side of that irrationality. The Mean Markets and Lizard Brains advice for how to profit from manias and crashes is divided into two parts. First well seek to prevent our own lizard brain from ruining us (this chapter). Then well look for opportunities to make money from others lizard brains (next chapter).

This division of tips for investing in crazy markets is somewhat akin to preparing for a sports competition. To win, it is always good to be strong, fast, and experienced. The best strategy on any given day, however, also depends on the competition.

In the late 1980s, for example, the Detroit Pistons won consecutive NBA championships. In each championship year, they had to defeat Michael Jordans Chicago Bulls in the playoffs. To beat the Bulls, the Pistons relied upon excellent basketball skills (appropriate for any opponent), and they needed a specific strategy to contain Jordan. In this period of his career, Jordan was so dominant that opponents joked, He cant be stopped, just contained.

To contain Jordan enough to win, the Pistons developed what became known as the Jordan Rules. These included myriad defensive schemes,

frequent double-teams, and a tough approach that made Jordan pay physically for any attempted slam dunks.

The Pistons strategy was built on top of a talented roster that included Isiah Thomas, Joe Dumars, and Dennis Rodman. So the Pistons victories over the Bulls came from two complementary approaches. First, they had great players with solid fundamentals appropriate for any basketball game. Second, they used a specific, situation-driven strategy.

Similarly, investing success in a financial world that is often crazy combines an approach that is timeless with opportunism driven by the current situation. This chapter contains timeless suggestions for mean markets, and the next chapter provides timely advice for this era.

Why Our Toughest Financial Battles Are with Our Irrational Selves

We have met the enemy, and he is us. Walt Kelly coined this phrase in the comic strip Pogo on Earth Day 1971. Because people cause pollution, Kelly suggests that environmental progress must rely on modifying human behavior. Similarly, this chapter focuses on why we are so often our own worst financial enemies, and how to prevent this internal foe from bankrupting us.

In early chapters, we reviewed the evidence suggesting that mean markets stem from individuals who are far from rational. Furthermore, we found that the less-cognitive aspect of human mental abilities-the lizard brain-often causes our problems. To organize and utilize solutions to our financial shortcomings, it helps to understand why the lizard brain is built to bankrupt us.

Humans act irrationally in some financial situations because we are born without instincts that guide us to good solutions. In financial markets, we are fish out of water. The human financial situation is similar to that faced by other animals that live in unnatural, novel environments.