The Way of the Dollar

method – is essentially anti-crowd. We look where the crowd is not looking for an underlying rationale for the direction of the main trend. And we use a series of contrarian* sentiment indicators designed to orient us in the opposite direction to the crowd. This method has worked well, and it is timeless so it should always work. The method is OK. If we can have confidence in it and can apply it, we shall win.

But as the great traders constantly remind us, being able to have confidence in a method and to apply it consistently, hence winning, depends on our mental attitude. So long as our mental attitude is that of the crowd, we won’t make it. And but for the grace of fortune or our own determination, we are members of the crowd. Who is the crowd made of but you and me and the rest? If you cut us, do we not bleed?

Well, who is the crowd made of – the trading crowd, that is? Or more precisely, who dominates it? The Joker (the mischievous spirit of the marketplace) determined that the leaders of the crowd be the people most of the crowd aspire to be. Of above average intelligence; good at their lessons; possessed of highly analytical minds; plausible; conforming. The kind of couth, clean-cut individual that appeals to members of the investment committee, because he (she) resembles them or incarnates the image they have of themselves. Such are the people who run the management funds, bank trading desks, trust departments and economic advisory sections, at the major financial institutions.

Their (our?) mental attitudes and thought patterns tend to follow along similar lines, which have been programmed by their upbringing. Let’s consider three forms of programming which are common to all of us.

1) The first happens before the age of about six. The founder of the Jesuits, Ignatius Loyola (1491-1556), is linked with the saying: “give me a child till

he’s 7 years old… and I will show you the man.” (There are varying versions). The theory is that the beliefs and character of individuals can be set in stone by their programming in the early years of life. And since the work of Freud and the psychoanalysts, this notion has become more or less the conventional wisdom. As a Freudian psychoanalyst by formation, the brilliant American psychiatrist Dr Eric Berne* came up with a theory of personality which he called “transactional analysis*” (TA).

In a nutshell, Eric Berne believed that our personalities include three parts. Each of us has: a Parent, which consists of a system of beliefs received from our parents or whoever was looking after us from birth to the age of roughly six; a Child, which is the child we were at 6 years old; and an Adult, which is the part of us that responds rationally to the facts presented to us. Each of these can be called “ego states”, meaning “coherent systems of feelings which motivate a related set of behaviour patterns.” When our Child takes over, it dictates a certain behaviour pattern, and when our Parent or Adult takes over, they dictate different behaviour patterns.

Caricaturing grossly, the Child is impulsive (playful, petulant, intuitive, impatient, whimsical); the Parent is all pre-judgement (rule-bound, conventional, bigoted, occasionally sage); and the Adult is the computer (rational, analytical and independent).

The voice of the crowd equates with the voice of the Parent

Think back to occasions in the past when you were confronted by an experienced salesperson – a car dealer, say, or an insurance salesman, or a perfumery saleswoman – and you bought something you didn’t want; and consider whether your mental state and behaviour wasn’t that of a child before a parent. Smart companies teach their sales-people to take the adult role when they don’t do it naturally. Think also of the occasions when prescriptions you inherited from your childhood came between you and freedom to choose the right answer. The voice of the crowd, incidentally, would equate with the Parent. So does the voice of the ‘risk-committee’ meeting in your mind which decides you’ve been naughty, so you close out a perfectly good position.

Berne’s theory fits the findings of Dr Wilder Penfield, the famous American neuro-surgeon. In open-brain operations carried out in the 1950s, Dr Penfield made some remarkable findings – operating with electric probes on patients who included epileptics. On stimulation of the temporal lobes of his subjects, whole tracts of experience from childhood and later years would sometimes come bubbling out. I say experience, because it

wasn’t so muchmemory as actual ‘playback’ of “what seems to the patient to be present experience.” Penfield concluded that the playback was a “reproduction of what the patient saw and heard and felt and understood” at the time of the original experience. Such childhood ‘recordings’ cannot be erased, it would seem. They are with us forever.

Following in the footsteps of the original psychoanalysts (Freud, Adler, Jung et al), Dr Berne’s theory of personality developed largely from observation. As its name, transactional analysis, implies, it provided an explanation for the common transactions that take place between two or more people and it lent itself to group therapy rather than the analyst’s couch. Hence by the time Berne died, in 1970, transactional analysis had been tried out and seen to fit in tens or even hundreds of thousands of case studies in and outside California (where Berne practised).

He went on to conclude that people’s lives followed a more or less detailed “script”, programmed by the original childhood experience, with a sad or a happy ending. The best statement of his final theory is to be found in his last book What Do You Say After You Say Hello* , which everyone on earth must read.

A winner says: “I made a mistake, but it won’t happen again.”

To the point, Berne discusses ‘winners’ and ‘losers’. Winners have an OK Child, and a helpful Parent. Winners, needless to say, achieve what they set out to do: losers don’t. A winner says things like “1 made a mistake, but it won’t happen again.” A loser says “If only… I should’ve… Yes, but.” And in between are ‘non- winners’ who are scripted to break even. “They are ‘at leasters’… they say ‘Well at least I didn’t make a loss…’.” Perhaps we recognise ourselves in all of these situations. Recognition is the sine qua non: the first step on the difficult road of turning ourselves into habitual winners from non-winners and losers.

We might as well admit that it’s a difficult road. Most people are losers in efficient markets. It must be so because that’s the way markets work. But it doesn’t have to be so in life, and yet it is –isn’t it? A fellow transactional analyst of Berne’s and founder of the Institute of T A in Sacramento Ca, Dr Thomas Harris* concluded “it is a fair estimate to say that everyone has a NOT OK Child” (from I’m OK– You’re OK*, first published in 1967). As a result of all the’ don’ts’ and ‘can’ts’ it has inevitably received, “Very early in life, every child concludes ‘I’m not OK’. We make a conclusion about our parents also: ‘You’re OK’.” This, being the starting point for everyone, is the common position for most adults. It is also the position of “losers

who call themselves gamblers” as Heme puts it –though “Because it is a decision it can be changed by a new decision. But not until it is understood” adds Harris.

Finally, almost all of us inherit an injunction from our Parent to worry. To care about being right. To care about money. And to work hard. No-one told us that the hard work ended with ‘doing your homework’.

2) The second form of programming was mentioned in Chapter 8. In short, money has become the symbol of success for modern society. Even Nobel Prizes are attended by a handsome purse. Setting aside our personal views on the matter, let’ s simply recognise that the situation today is very different from what it was in the first millenium before Christ –not to mention palaeolithic times. Making money now occupies most of most peoples’ lives and spending it selectively occupies much of the rest.

The upshot is that we are conditioned to regard money as important (the crowd is, anyway). Making it is nice; losing it is nasty .That is something we may have to work on, because if we find losing money is nasty, it may be difficult torus to take losses. And every successful trader agrees that taking losses must be no problem; at least one of the most successful traders alive regards “cutting losses” as the most important rule of trading.

3) The third form of conditioning comes primarily from schooling. As you know, our brain is divided into two halves (like most of the rest of our bodies –two arms, two eyes etc). In the early 1960s, some experiments were conducted on badly incapacitated cases of epileptics, which consisted of cutting the corpus