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When I check into a hotel, I never get the key to the mini bar. Without the
key, I don™t need willpower to avoid any late-night temptation to devour
260 Profiting from the New Science of Irrationality

junk food. I have found that most temptations are better avoided than
I™ve noticed that some hotels no longer have mini bars, but instead
they lay the food out on top of a table. Thus, the “don™t get the key”
defense doesn™t work. In such cases, I call down to the front desk and
have them remove the food.
I once arrived at one such devious hotel so late at night that I wanted
to go to sleep immediately and not wait for someone to remove the food.
As a partial preventative measure, I put a towel over the chocolate bars
and other treats. While I still knew the junk food was in my room, at least
I couldn™t see it.
As we have seen, our investing instincts are out of sync with market
opportunity. The investments that feel good are precisely those that are
most likely to cost us money, and vice versa. This leads to the paradoxical
situation that we sometimes gain by having fewer options. Usually, hav-
ing more options is better, but when our instincts lead us to bad choices”
as with junk food in the mini bar or with emotional investing
decisions”we can make ourselves better off precisely by limiting our
This “less or more” insight into self-control has become closely asso-
ciated with the story of Odysseus and the Sirens. On his way home from
the Trojan War, Odysseus had to sail past the Island of Sirens. These
maidens™ song was so beautiful that sailors approached them and were
killed as their ships crashed on the rocks surrounding the island.
The goddess Circe warns Odysseus of the danger and provides him
with a solution in this passage of The Odyssey:

If any one unwarily draws in too close and hears the singing of the
Sirens, his wife and children will never welcome him home again,
for they sit in a green field and warble him to death with the sweet-
ness of their song . . . but if you like you can listen yourself, for you
may get the men to bind you as you stand upright on a cross-piece
half way up the mast, and they must lash the rope™s ends to the mast
Timeless Advice 261

itself, that you may have the pleasure of listening. If you beg and
pray the men to unloose you, then they must bind you faster.18

By following Circe™s advice, Odysseus survives the Sirens. He has him-
self strapped to the mast, and he commands everyone else on the ship to
put wax in their ears so that they cannot be tempted by the Sirens.
Because Odysseus is unable to control his ship or his men, he hears the
Sirens, but is unable to approach their deadly shore. He achieves his goal
precisely because he has limited his options. By tying his hands,
Odysseus gets what he wants.
Inspired by this story, “mast-strapping” is used in the scientific litera-
ture on self-control to explain how having fewer options can sometimes
lead to a better outcome. If we didn™t have self-control problems, then
more options would always be better.
For many people, financial mast-strapping can be a valuable tool. One
of the primary problems in investing is our own desire to trade too much.
Almost everyone seems to suffer from this problem, and so do I. Even
with all of my knowledge that trading on impulse is bad, I still feel the
tug every time I watch a market.
Because I like to trade too much, I have done some mast-strapping to
constrain my trading. The first thing I did was lock up the bulk of my
family™s financial assets in a full-service brokerage account that charges
$100 a trade. Why pay $100 for something that can be bought for far
less? For me, the answer is that $100 works to reduce my costly trading.
Originally, I also kept a small amount in a discount firm™s account that
charges $5 a trade. When the urge to trade struck me, I would indulge it,
but only in this “small account” with the low commissions. This setup
prevented me from overtrading most of our money. It was not, however,
a perfect solution.
The Waco Kid (played by Gene Wilder) in Blazing Saddles had a sim-
ilar problem to mine. While playing chess with the Sheriff Bart of Rock
Ridge (played by Cleavon Little), Wilder says, “I used to be the Waco
Kid.” The sheriff asks, why “used to be”? In response, Wilder holds out
262 Profiting from the New Science of Irrationality

his right hand, which is rock steady. The sheriff says, that looks fine, to
which the Waco Kid raises his other arm which is uncontrollably shaky,
and says, “yes, but I shoot with my left.”
My first mast-strapping solution still had me doing the equivalent of
shooting with my left. I did far too much trading in my “little” account.
It didn™t cost me any significant money, but I spent so much time on the
account that I was probably making minimum wage for my efforts. After
about a year of this experiment, I closed the smaller account. This more
secure mast-strapping has, so far, been a total success. With no ability to
trade cheaply, I haven™t traded impulsively.
I suggest that almost everyone, except for the top guns of trading, struc-
ture their world so that they cannot trade impulsively. The exact setup will
vary for each person. Many people would still trade even at a cost of $100
a trade, so the solution that works for me won™t work for everyone.

A pervasive problem with our efforts to improve by mast-strapping is that
there™s usually someone who would profit from untying us. Just as hotels
seek to profit by leaving candy bars on the counter, there will always be
firms that are happy to help us trade. We need to be crafty to construct our
finances so that we won™t be tempted to make bad decisions.
I helped my friend Doug (the millionaire surfer) quit smoking. He
agreed that if he smoked even one puff of a cigarette, he would have to
pay me $100. Furthermore, immediately after that first puff, he would
have to call me to acknowledge defeat. Our agreement was set up for one
year, and Doug made it for the entire year without a smoke.
Why did this silly arrangement work to get Doug to quit? The answer
is that it tapped into Doug™s psyche in the right way. He and I were a bit
competitive, and so the prospect of paying me even a nominal sum was
loathsome. Furthermore, Doug is honest enough that he wouldn™t cheat
and lie about smoking. Finally, the need to call and immediately
acknowledge defeat was a potent deterrent.
The right answer for everyone is to avoid emotional trades. The way to
accomplish that is to make structural arrangements so that emotional
Timeless Advice 263

trades are not possible. The details of the correct form of financial mast-
strapping will vary for each individual.

Conclusion: Those who trade too much should arrange their finances so
that impulsive trades are not possible. Remove temptation; do not expect
to resist it.

Do Not Trade in the Red Zone

“Happy families are all alike; every unhappy family is unhappy in its own
way.” So begins Tolstoy™s Anna Karenina. Similarly, successful traders
avoid making self-destructive investment decisions. The specifics are
idiosyncratic; the general lesson is to constrain the lizard brain that lurks
within each of us.
All of the tips I™ve suggested can be understood as efforts to get con-
trol back to the investors™ rational side and away from that lizard brain.
While the lizard brain is great for lizard-like activities like finding food
and shade, in financial markets, our instincts are the enemy.
My friend David the oil trader has learned how to avoid such mistakes
on his way to a lucrative trading career. In Chapter 4 we heard one of
David™s secrets is that “he knows when the buying is real.” I learned
another of David™s secrets one day in the 1980s. In order to profit from an
anticipated rise in oil, I bought a single oil futures contract, which repre-
sented 1,000 barrels of oil. For every penny™s rise in the price of oil, I stood
to make $10.
Almost immediately after my purchase, however, the price of oil
started to decline. My losses began to mount: $10, $30, $70, and more.
This wasn™t any fun at all. Furthermore, because I was a student, these
amounts became a significant portion of my net worth at the time. I took
the pain of my losing position for about 30 minutes, by which time the
loss exceeded $200. I turned to David and said, “I™ve got to get out.” He
said, “I got you out a long time ago, I just wanted to see how much pain
you could stand.”
264 Profiting from the New Science of Irrationality

Over the years I™ve learned that David almost always exits his losing
positions very quickly”just as he got me out of my trade almost immedi-
ately. He™d rather take a quick and small loss instead of letting the position
eat away at him financially and emotionally. He summarizes his philoso-
phy by saying, “I don™t trade in the red zone.” By that he means that los-
ing trades (those in the red zone) are exited very quickly, while he™s
willing to ride his profits (trades that are in the black) for much longer.
Don™t trade in the red zone.
While David interprets this strategy literally to exit losing positions, I
interpret it more broadly. I suggest that people not trade in the emotional
red zone. What™s the definition of a psychologically defined zone? The
answer can be drawn from the legal efforts to restrain pornography. In the
1964 Supreme Court case Jacobellis v. Ohio, Justice Potter Stewart wrote
that, he could not define hard-core pornography, but stated “I know it
when I see it.”19
Similarly, there is no objective definition of the emotional red zone,
but I think we know it when it happens to us. If an investment is eating
away at us, we should consider exiting. (Such considerations should, of
course, be done in an unemotional manner.) “Use the Force, Luke. Let
go.” The spirit of Obi Wan Kenobi suggests that Luke will know the right
answer himself. Similarly, the specifics of avoiding the red zone are dif-
ferent for each person. The result, however, should be the same for all.
An investor who avoids the red zone, should, for example, be able to
(i) go on vacation for weeks and not look at the markets, (ii) increase or
decrease any position, (iii) take large price changes in all markets with-
out having to buy or sell anything, and (iv) sleep without thinking about
Those who can develop such a no-red-zone system can never be
forced by their emotions nor by market dynamics to make a decision. The
first step to making money is not “plastics” but to avoid letting the lizard
brain make emotional and costly investment decisions. This is not easy
because, like Michael Jordan, the lizard brain can™t be stopped, “just con-
tained.” Those who contain the lizard brain will have taken the first step
toward profiting from mean markets.
chapter eleven

Investing in the Meanest of Markets

A Generation of Rewarding Risk

In the introduction we met Adam, my former Harvard Business School
student who asked, “Where should I invest my money?” In the early
1980s, I grappled with the same question. At the time, I lived in southern
California and did a lot of surfing with my buddy Gary. Surfers spend far
more time bobbing around in the ocean waiting for waves than actually
riding them. Gary and I filled our spare time with a debate about how to
make money; I argued that stocks were the best investment, while Gary
favored real estate.
I loved stocks in the early 1980s because they were amazingly cheap!
The Dow Jones Industrial Average sat near 1,000, and fantastic compa-
nies had single digit price to earnings ratios. Gary™s love of real estate
was based on supply and demand. There is a limited supply of beach real
estate and, over time, essentially an unlimited demand by people who
want to soak up the sun.

266 Profiting from the New Science of Irrationality

Gary and I each acted upon our beliefs. I invested every dollar I had
into stocks, while Gary developed an aggressive system of acquiring real
estate. As soon as he could scrape together a down payment, he would
buy a rental property. He would then squeeze every possible penny out of
the rents and minimize costs (he even went so far as to do the weekly
cleaning of his beach properties himself”I always pictured him in a wet-
suit and a maid™s outfit). As soon as he amassed enough cash for another
down payment, Gary would buy another property to increase his empire.
So who was right, Terry or Gary? In the early 1980s, was it better to
have invested in stocks or in southern California real estate? Stocks have
gone up by more than 1,000% while land values have steadily increased,
but at a slower rate. So does that mean I was right? No. As we discussed
in Chapter 9, real estate allows much higher leverage than stocks. Thus,
Gary™s aggressive”buy as much as you can with borrowed money-
strategy earned him a far higher rate of return than was possible in the
stock market.
While Gary and I were both bored by bonds, they too provided very
strong returns. In 1980, an investment in bonds, particularly a risky
investment in long-term bonds, would also have been richly rewarded.
In the early 1980s, picking the right investment was easy. Stocks,
bonds, and houses all soared. The only possible mistake, therefore, was
to avoid financial risk. For an entire generation, risk was richly rewarded.
The only way to lose, it turned out, was not to play. So if Adam were ask-
ing his question in 1980 the answer would be clear”borrow as much
money as you can, take as much risk as you can stand, and rake in the
cash. The conventional wisdom says that risk is still the right course for
patient investors who seek high returns. But is it?

The Bull Market of a Lifetime?

The famous Chinese “curse” says “May you live in interesting times.”
The quirky aspect of human nature is that we are built to expect that our
Timely Advice 267

own idiosyncratically interesting times are simply normal. The interna-
tional man of mystery, Austin Danger Powers, experienced a variant of
this problem.
In 1967, Austin Powers (played by Mike Myers) was cryogenically
frozen to prepare for the day that archvillain Dr. Evil (also frozen, and
also played by Mike Myers) might once again threaten the world.


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