IT'S ALL ABOUT HOW YOU THINK, STUPID!

The first time I went to New York was with my family. We visited the American Museum of Natural History. Fascinating. It has an exhibit called the Heilbrunn Cosmic Pathway, a 360-foot walkway spiralling downwards through a display that maps out 13 billion years of cosmic history. The Big Bang is at the top of the ramp, the present day at the bottom. As I was slowly winding my way down the exhibit, I could hear my family complaining from below, demanding I hurry up. Okay, so I was stopping to read every word the exhibit offered, but this stuff was interesting. And at the rate of 36 million years per foot of walkway, why the hurry?

I couldn't help but be overwhelmed by the proportions of the ramp. It hit me that I was being shown a very important fact: in evolutionary terms humans haven't been around very long. While the exhibit presented the universe as a time trail 360 feet long, the entire history of mankind was represented by the width of a single human hair at the very end. Homo sapiens is but a blink in the life of the cosmos.

Only for the last 50 000 years has Earth been home to a creature that, if dressed in a pinstriped suit, would resemble a modern-day stockbroker. Of that 50 000 years, stock markets have been around for only about 400. That's less than 1 per cent of human existence — definitely not long enough for Darwinian forces to sculpt our primitive brains into useful stock-trading accessories. Besides, why should the stock market influence the way we process information anyway? It's a poor evolutionary sieve. Successful investors have bigger bank accounts, but that doesn't mean they have bigger families!

The fact is, evolutionary forces aren't found on any stock exchange. Our brains were shaped in primeval swamps and savanna grasslands aeons ago. Our instincts were honed in an environment of physical risk, not financial risk.

The fight-or-flight response might have saved our ancestors from becoming a sabre-toothed tiger's dinner, but it's an impediment when it comes to investing. When financial markets collapse, panic initiates selling, which is pretty much the worst thing an investor can get involved in at the time. But this innate human response delivers an advantage to those investors and traders who can resist it. Jesse Livermore realised he could profit from this human frailty, as this popular quote of his shows:

There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again and again and again. This is because human nature does not change, and it is human emotion that always gets in the way of human intelligence.

More than two centuries earlier, during the South Sea Bubble, the London attorney of a Dutch investor made the following observation of the activity on Exchange Alley: ‘I had a fancy to go and look at the throngs … and this is how it struck me yesterday; it is like nothing so much as if all the lunatics had escaped out of the madhouse at once.'¹⁴³ The trick is to avoid becoming one of the lunatics who has escaped from the madhouse, which is easier said than done. A brief diversion from the financial markets will show what I mean.

Consider the true story of William Buckley, an English convict who was shipped out to Australia as part of the first European settlement in Victoria. The settlement was established in 1803 when around 400 settlers from England sailed into Port Phillip Bay aboard two ships, HMS Calcutta, a 52-gun man-of-war, and the Ocean, a transport ship. Buckley, then aged 23, was one of the 299 convicts in the party.

Dissatisfied with settlement life, Buckley escaped into the Australian bush. When he later saw the ships pull up anchor (they were sailing to Tasmania to establish a settlement in Hobart), he knew he was now the sole European left on the shores of Port Phillip Bay. He started living with the Aboriginal people, principally with the Barrabool, a small group of the Wathaurong tribe, around the Barwon River district. Buckley had no contact with Europeans from then until 1835, 32 years later, when he was ‘discovered' by a European survey party. He was then reintegrated back into Australian/European society, where he remained until his death in 1856.^a

A biography of Buckley, by John Morgan, was published in 1852. What's extraordinary about Buckley's story is that when he was found in 1835, after 32 years of cohabitation with the Aboriginal people, he had totally adopted their culture. He thought, behaved and spoke as they did. He even had to relearn English, despite having spent his first 23 years as an Englishman. That a mind can totally adapt to changes in its surroundings, that it can totally reconstruct its values and beliefs, was no less a surprise to Buckley himself. The following are his words:

The reader may wonder, how it was possible for anyone like myself who had, in my earlier life, been associated with civilized beings, so to live; but I beg him to remember how many years I had led a different sort of existence, and how easy it is for the human being, as well as every other, to change his habits, taste, and may I add, feelings, when made the mere creator of circumstances. I look back now to that period of my life with inexpressible astonishment, considering it, as it were, altogether a dreaming delusion, and not reality. Perhaps there is no one living who can cast his mind back to so many years of his past life with such a multiplicity of extraordinary sensations, as have fallen to my lot to experience.¹⁴⁴

His mind had been totally ‘reprogrammed' to suit his new set of circumstances.

Buckley's story delivers a powerful message to investors. If we accept our susceptibility to groupthink, if we are able to admit that our vulnerability is so pervasive that we will likely fall prey to it without even being aware of it happening, then we can begin to understand that those who can maintain an independence of mind will have the greatest chance of investment success. You should always be seeking correctness, not consensus.

The Greek philosopher Socrates (470–399 BC) defined the framework for what is now termed the Socratic method. The Socratic method tells us that the correctness of a statement can be determined, not according to whether it is held by the majority, but according to whether it is incapable of being rationally contradicted. By the use of the Socratic method you need not second-guess whether the majority is correct or not. Simply ignore the crowd and determine for yourself what is the correct (or as near as possible to correct) answer. There is no doubt that Graham's approach to investing was aligned with the Socratic method. He clearly articulated this in The Intelligent Investor: ‘You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.'

How then must you think when assessing stocks? Answer: Like a businessperson who's looking for a great business but wants to pay as little as possible for it. Close your ears to the opinions and bids being made by all other parties involved.

How must you not think? Answer: Like nearly all other people.