Yes, March Madness. Ride higher? Take profits, bail? That’s the big question America’s 95 million investors are asking.
We called the bottom at 6,547, a new bull in March 2009. Market’s been up over 100% since. But big risks ahead: Stick or bail?
Bet you’re maxed out on all the contradictions from Wall Street noisemakers. So let’s get some advice from four unconventional sources. First, start with Intel’s former CEO Andy Grove, who wrote in his “Only the Paranoid Survive.” This sure fits listening to bulls: “The person who is the star of a previous era is often the last one to adapt to change, the last one to yield to logic of a strategic inflection point and tends to fall harder than most.” You decide, you commit.
Next: Over at Oprah’s magazine, Tim Jarvis says: “Cheer up. Be happy. Find the silver lining. Smile. If you didn’t know any better, you might say we’re a country that preaches optimism. But some 30% to 35% of Americans employ a calculated form of negative thinking — called defensive pessimism — that can lead to very positive results.”
America’s 95 million investors: one-third bears, two-third bulls
Yes, yes, a huge 30-35% of us investors are winning because we’re natural skeptics. Don’t trust Wall Street gurus. We instinctively know that “defensive pessimism, can lead to very positive results.”
The other 65% of investors naturally think short-term. That 65% love playing the markets. They push the envelope till everybody goes off a cliff, and into denial about all their losses. Do the math: even with today’s record Dow, in the last 13 years — through the recessions of 2000-2002 and 2007-2009 — the stats prove that on an inflation-adjusted basis Wall Street is still a net loser for over a decade.
Why this roller-coaster ride? Our third contrarian, Barbara Ehrenreich, says we’re overconfident, too optimistic. She hit the nail on the head in her best-seller, “Bright-sided: How Positive Thinking is Undermining America”: “Being positive, we are told, is the key to success and prosperity.” In fact, that Napoleon Hill “Positive Mental Attitude hype and happy talk could kill you:
“On a personal level, it leads to self-blame and a morbid preoccupation with stamping out ‘negative’ thoughts,” says Ehrenreich. “On a national level, it’s brought us an era of irrational optimism resulting in disaster.”
Yes, just remember the irrational exuberance of 1990’s sock puppets and 2007 condo-flippers, too much happy talk just before the last two crashes.
Coach Knight: winning with the positive power of negative thinking
And that brings us to the in-your-face irascible basketball coach Bobby Knight, whom fans everywhere love to hate. And March Madness is perfect timing for his new best-seller, co-authored with Bob Hammel: “The Power of Negative Thinking: An Unconventional Approach to Achieving Positive Results.” One of the game’s greatest, a legend with three NCAA championships and a 42-year 902-374 record at Army, Indiana and Texas Tech.
Yes, unconventional from the start: Knight got his first lesson on the positive power of negative thinking from his grandmother: “If wishes were horses,” she’d say, “beggars would ride.” They don’t. USA Today just ran a piece by Amanda Kingsbury of the Indianapolis Star opening with Knight’s remark that Charles Darwin would “have made a hell of a coach.”
Easy to see why: “In the struggle for superiority (and national championships), natural selection doesn’t favor good effort or self-esteem, and it definitely doesn’t hand out trophies for participation. The mentally precise and physically fit win, and the mediocre and obtuse take solace in hopeful cliches.”
Reminds us of the famous Terrance Odean-Brad Barber research on investors: Over 80% of America’s investors, lose, don’t win trophies, then lapse into denial behind positive affirmations, telling themselves they’ll win next time. Knight says “the irrationally upbeat live life at their own peril, and set themselves up for a Custer-style butt kicking.” Odean-Barber proved it.
Winners make the fewest mistakes … in coaching and investing
Knight’s bottom line, says Kingsbury’s: “If the book could be summed up in one sentence, it’s probably the short, italicized one found in the introduction: “Victory favors the team making the fewest mistakes.” Winners work hard to minimize the risk of losing. “As ‘optimism bias’ research has shown, most humans think they’re smarter, more talented, and generally above average than everyone else.”
Get it? The vast majority of investors aren’t keeping up with inflation because they’re not prepared, then make too many mistakes.
Listen to some more Andy Grove warnings on mistakes, highlighted by Mike Sager in an Esquire interview: “You must understand your mistakes. Study the hell out of them. You’re not going to have the chance of making the same mistake again — you can’t step into the river again at the same place and the same time — but you will have the chance of making a similar mistake.”
Knight prepared: With endless disciplined drills on the fundamentals, footwork, dribbling, foul shooting, defense. Minimize risk of mistakes.
We’ve added our thoughts about what Knight’s strategies mean for investors:
- Forget “Positive Mental Attitude” bull. Knight: “The key is not the ‘will to win’… everybody has that. It is the will to prepare to win that is important.” As an investor are you preparing for what’s coming? New bull? Another crash? New bear? Working hard preparing?
- Know thyself. Demand the truth. No denials. Knight: “Don’t demand of people what they can’t do. Demand what they can do.” Translation for investors: Are you a Jim Cramer type active trader? Or a Buffett buy-and-hold investor? Do you know what strategies best fit the real you? Get out of denial.
- Stop talking and just listen. Knight says: “Get yourself a degree from the Shut-Up School and remember it when talking about your competitors, whether they’re a sport team or a sales team,” or other investors. Stop talking, “self-promotion and gloating never have a place; let your products or your performance do the talking.” The truth will set you free, Admit the truth about your performance. Stop repeating the same mistakes and you’ll improve.
- Don’t expect a cheering squad. Knight told players, “don’t wait for me to pat you on the ass. Just worry about me booting you in the ass.” Investors know when they’re winning or losing. The rest of the time you’re just running up and down the court, prepared to take advantage of a new break.
- Never listen to “bright side” bulls. “Don’t be blind to negatives,” says Knight. “Never allow what you consider positive things to override your ability to determine what the negatives of a situation are. Those negatives will always turn out to be more important than what feels ‘right’ about a job. You can fool yourself about what is right.” Discover the “positive power of negative thinking.”
- Are you too aggressive? Vulnerable? Kingsbury quotes Knight: “Tolerant people do not make good leaders. Successful leadership is being hard to please — and your players or employees know it. They will settle for what you tolerate. A great leader is an intolerant one.” My research on personality types tells me most active traders are tough, aggressive guys like Knight and Cramer, for example. But remember, while that strategy works in business and on the court, it does not work when you’re betting against the massive firepower of the Wall Street casinos. Overconfidence and overoptimism result in mistakes for investors. The real challenge for the vast majority of investors is to wake up, take change of yourself, and admit that the trend, professional traders and all the casino croupiers are not your friends, they want your money, and they’ll beat you every time.
- Stop making loser’s excuses. Kingsbury quotes Knight: Yes “somebody will win, somebody will lose, but don’t ever tell me the difference every time is that the winner wanted to win more than the loser did.” Just an excuse. If you believe that, if you ever justify your bad performance by saying Wall Street casinos have too many high-powered croupiers working 24/7, then you need a shrink. You’re still trying to beat the casino. You can’t win. Go back, reread Charles Ellis’ “The Loser’s Game” and find out why.
Bottom line: If you really want to improve your game as an investor, read Knight’s “The Power of Negative Thinking: An Unconventional Approach to Achieving Positive Results.” He knows “winning favors investors who make the fewest mistakes.” And remember Andy Grove’s wisdom, “only the paranoid survive” betting against the Wall Street casino.