Beware of These Investing Illusions

Nick’s Note: Today, we’re sharing something special with Daily readers…

Chris Mayer—one of Bill Bonner’s top investing experts and editor of Chris Mayer’s Focus—just published his new book How Do You Know?: A Guide to Clear Thinking About Wall Street, Investing, and Life. It’s becoming quite popular around our offices, and is a refreshing perspective on the financial world.

So enjoy the excerpt below, where Chris reveals how to avoid popular investing “illusions”…


By Chris Mayer, editor, Chris Mayer’s Focus

The real secret of magic is that the world is made of words, and that if you know the words that the world is made of you can make of it whatever you wish.

– Terence McKenna (1946–2000), lecturer and author of True Hallucinations

I think that the most pervasive and fundamental of these obstacles to change and growth is a complicated condition we can call by a simple name… ‘a belief in magic.’ I think we all believe in magic.

– Wendell Johnson (1906–1965), psychologist and author of People in Quandaries

Abracadabra.

The word, Aramaic in origin, means, “I create with words.” (This is one theory, among several, for the origin and meaning of the phrase. As with so many things, it is a matter of contention.) Its associations with magic are all too apt.

As you’ll see, investing (and life) is full of tricks and illusions based on little more than word magic. This book, in a sense, is a guide to breaking these spells.

For much of what we think about Wall Street, investing, and life rests on nothing more than abstractions—words and symbols (and words are a kind of symbol)—that have no basis in the world “out there.” In short, we make them up. They exist in our heads only. And yet we come to treat them as if they were real.

In doing so, we deceive ourselves and allow others to deceive us. We waste a lot of time on pointless guesswork. We make avoidable thinking errors. We put our trust in bad maps and wander astray. In the markets, we lose money—and a piece of our sanity.

What we need is a radically different way to think about the world around us. We need a way of thinking mindfully of this abstracting and the limits of those abstractions.

Fortunately, such a way exists, though it seems largely forgotten except by a small group of connoisseurs. In what follows, I’ll share with you this robust framework for identifying and piercing through these abstractions. I’ll give you tools to sharpen your thinking. If you work with these tools, I guarantee you will see results. I can’t guarantee you won’t ever fall for magical thinking again. But you will fall for less magical nonsense than before.

Francis P. Chisholm (1905–1965), who taught at the State Teachers College in River Falls, Wisconsin, and who was an advocate of what I’m going to tell you about, spoke eloquently about its benefits in his Introductory Lectures on General Semantics.

Among the benefits:

  • “Understanding and overcoming primitive and infantile linguistic habits such as word magic.”

  • Overcoming faulty thinking habits that underlie dogmatism, prejudice, etc.

  • Removing “thought blockages” and bad reading habits.

  • Awareness of silent assumptions, meanings, and beliefs.

As someone who has adopted this approach, I’d add at least a few more benefits:

  • Deeper appreciation for the complexity of our world, the tenuous nature of cause and effect, and the limits of our knowledge.

  • Skepticism regarding labels, names, and classifications.

  • Greater sensitivity to differences.

  • Awareness of the difficulty of escaping our own conceptual grids or “reality tunnels” (to use Timothy Leary’s phrase).

To get us there, I’ve got a basketful of mental devices that will help protect you against spells and word magic. I’ll share all of this with you in the pages that follow.

The thesis I advance here has a rich history and is radical in what it suggests, though initially it may seem obvious. When pursued to its logical ends, I assure you, the deeper implications are startling. And we will push them to their limits in what follows.

Magical words and symbols—Wall Street’s spells—manifest themselves in various ways. I will highlight and categorize as many as I can think of.

I’ll also add that the field here is open. The last book—and, so far as I know, the only book—to cover what I’m about to share with you came out in 1958. The original title was The General Semantics of Wall Street by John Magee.

The book in your hands is the first effort to bring “general semantics” back to Wall Street and the investing public in 60 years. We’ll get to what general semantics is all about in Chapter 1.

(As an aside, “Wall Street” itself is an abstraction. It exists as a place, but it is also a symbol—of greed, money, power, and more—as Mr. Magee pointed out in the first chapter of his book in 1958. We can’t help but abstract, as I will point out more than once, but we can know when we’re doing it and cultivate an awareness of abstracting and the limitations it entails.)

Yes, You Can Change History

You have surely heard people say, “You can’t change history.”

Of course you can.

The thinking error here comes from the misconception that history is a series of events existing as a reality separate from how we think about them. Not so. History exists only as interpretation, as memory, as stories we tell ourselves. All of which we can, and do, change.

I want to share an interesting passage on this from the philosopher Oliver Reiser (from Logic and General Semantics: Writings of Oliver L. Reiser and Others, edited by Sanford Berman):

There is a very general belief that the past is irrevocable, that history cannot be changed. Now, it is doubtless true that the past is past, but certainly this does not prove that the past is unalterable… In the cultural interpretation of human history, the past is what it is because of its influence on the present. And if we change the present, we have in a sense altered the past… If, in the sphere of individual history, the meaning of an experience suddenly breaks upon us, that original event is no longer what it was. Experiences and events are what they function as, and if we change the effects and meanings, these original phenomena are no longer what they were, at least to us. There is here a real alchemy in events that is grounded in time’s living progress. [Bold added].

This alchemical magic is why there are new interpretations of the American Revolution every generation or new biographies of Abraham Lincoln and on and on.

It is because each historian can rewrite the story by casting new meanings and tracing different effects onto selected past experiences and events. The historian, in a way, fuses “thinking-feeling about the present” with “what has gone on before.”

It is perfectly legitimate to do so. As we will learn later, reality is a product of the observer and the observed. There is no such thing as objectivity. To be objective is like trying to bite your own ear. It can’t be done. Everything we “see” must be processed and filtered through our human nervous system. And no two people process and filter in the same way.

To cast the same idea of “history as only what we think of it” in more poetic terms, I want to share this passage from Alan Watts’ autobiography, In My Own Way:

The past is nothing but a present memory, a shadow, a trace; the illusion that a cigarette whirled in the dark is an actual circle of fire.

(Watts wrote beautiful, philosophical books and is most famous as a popularizer of “Eastern religions.” We’ll come back to his ideas and insights throughout this book.)

What is history? It is words and symbols. Abracadabra again. We create history with words.

1 + 1 Does Not Always Equal 2

You probably take for granted that 1 + 1 = 2. It’s often thrown about as if it were some kind of law that is true always and everywhere. And yet it isn’t.

The statement “1 + 1 = 2” is a statement made up of symbols. They are not real-world phenomena. In the real world, many things are not additive. Alfred Korzybski, an important thinker that we will hear more from in the next chapter, wrote in his magnum opus, Science and Sanity:

In chemistry, for instance, does hydrogen ‘plus’ oxygen produce water, H2O? If we mix the two gases, two parts of hydrogen with one of oxygen we do not get water. We must first pass a spark through the mixture, when an explosion occurs and the result becomes water, a new compound quite different from its elements or from a mere mixture of them. Does one gallon of water and one gallon of alcohol make two gallons of a mixture? No, it makes less than two gallons. Does light added to light make more light? Not always. The phenomena of interference show clearly that light ‘added’ to light sometimes makes darkness. Four atoms of hydrogen, of atomic weight 1.008, produce, under proper conditions, one atom of helium, not of atomic weight 4.032, but of atomic weight 4. The 0.032 has somehow mysteriously vanished. Such examples could be quoted endlessly. They show unmistakably that structurally this world is not a ‘plus’ affair, but that other than additive principles must be looked for. [Bold added].

In business and in life, clear thinking requires that we do not assume that 1 + 1 always equals 2. Often you can combine two things and get something worth much less, as in a merger gone bad. And sometimes you can get something worth much more.

Expecting the real world to obey our made-up equations and mathematical models is a sure path to sloppy thinking and self-deception. That our equations and models seem to often describe how the real world works is a different thing than saying the real world adheres to our equations and models.

Markets have a way of humbling, and even ruining, those who think otherwise.

Regards,

Chris Mayer
Editor, Chris Mayer’s Focus

Nick’s Note: Subscribers of Chris Mayer’s Focus can access this new book in its entirety, for free, right here. And if you’re not a subscriber, you should consider joining.

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And he’s so confident in this strategy, he’s putting his reputation on the line to prove it to you. Get the full story right here.

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