I have this friend – let’s call him Cal – who’s made enough money in the stock market to last the rest of his life. He loves learning and is widely read. From his studies he’s able to make lots of inferences and connect widely disparate dots. He then figures out how these connections might potentially impact a company’s stock price and send it higher. Cal then writes up his research and thinking and publishes it in a newsletter several times a day, complete with charts of the companies he’s researched. And he does it because he loves it. He emails his research to folks for free.
In any one week, Cal might mention 20 companies. They’re mostly low-priced companies that have fallen out of favor. Part of Cal’s reasoning for focusing in this area is that it’s easier for the market to take a company like Neothetics (NEOT) from .70 cents to 1.40 than it is to take Apple (AAPL) from $105 to $210. The percentage gains are the same 100%, but the amount of money the market requires to obtain those gains is significantly different.
Of the 20 companies that Cal might recommend in any week, 18 of them will make money and perhaps 2 of them will remain cheap or lose money. Guess which two companies my brain invariably has me hone in on!
The Fascination of Loss
Even though losing money is painful – money is often wired as part of the brain’s survival circuitry – and stressful, leading to all kinds of bad decisions – I still find it fascinating that I can so unerringly select Cal’s few losers. Take Water Generation Industries (WGI – a fictional company based on a real one) as a recent representative example. In mid-September of last year, simply because a notorious name in the industry had given WGI a casual mention in the financial press the price shot up from .94 to $3.47! I later bought the stock (cheap, I thought) at .74 cents shortly before they announced earnings.
Well, the company’s report was pretty much as the market expected. However, they projected a 60%-80% increase in revenues going forward! Normally, when a company makes such projections, the stock price will skyrocket. WGI’s price at this writing: .61 cents. I’ve lost roughly 18%.
Hardwiring Feedback Loops
So, what might be going on here? First of all, when it comes to money, I think it’s important to know how memory works. It’s useful to think of memory simply as learning. When learning takes place, cells in the brain make connections. No connections, no learning. Multiple connections – powerful, memorable learning.
Neuroscientists recognize two kinds of learning/memory: explicit or declarative; and implicit or procedural. The first is conscious and we mostly use language to demonstrate it. The second, Procedural memory (“knowing how”) is …
the unconscious memory of skills and how to do things. These memories are typically acquired through repetition and practice, and are composed of automatic sensorimotor behaviors that are so deeply embedded that we are no longer aware of them. Once learned, these “body memories” allow us to carry out ordinary actions more or less automatically.
When you grow up in poverty, your brain and body “learn” how to be poor. Through repeated exposure to the conditions that lack of money creates, through procedural memory, your neurophysi- ology learns to adapt and feel “at home” with poverty. Being poor feels familiar and “right.” It has laid down learning connections in the brain that take little energy to operate that are mostly unconscious. And we’re unconsciously and powerfully drawn to things that will tend to keep us feeling comfortable and familiar. Which is part of the reason I believe it’s so easy for me to significantly beat the odds in personally picking the two losers out of Cal’s 20 stocks. It’s not me; it’s my body’s memory.
Disconnecting and Rewiring
I’ve come up with three things I want to practice in an attempt to disconnect the early wiring and unlearn this procedural conditioning carried over from childhood. First, I’ve got to gradually move in the direction of things I don’t feel comfortable with, learning to incrementally manage the discomfort. With the stock market, as an experiment, I probably should stay away from Cal’s picks that I really like. Better to meta-learn his reasons for selecting the companies he does and also choose companies from his list that I don’t much resonate with initially, like small banks, which Cal specializes in.
Next, when I have the urge to sell, I should pause, especially when it’s a “reactive sell.” Reactive sells are “unreasonable” – meaning the decision isn’t arrived at by clear reasoning – and are almost always generated by unconscious procedural memory wanting to homeostatically discharge the stress hormones and make me feel better. Reactive selling accomplishes that.
Finally, with affirmations and by calling up conscious declarative memories with regard to a few successful market selections I have made – by repeatedly attending to the conditions that resulted in those being successful – I will begin to strengthen new learning (brain cell connections) and let the old, unhelpful connections hopefully sever their adherence proteins and die out from disuse.
And with all of this, I probably will be very well served by patience … with my own brain and its slow growth and change, and with the daily operating brains that work as this global collective entity we call the stock market.