Friday, August 04, 2006

Seeing The Gorillas in the Middle of the Market

Laurence Gonzales, in his fascinating book "Deep Survival: Who Lives, Who Dies, and Why", describes a research study from Harvard psychologists. They showed people a film of basketball players passing the ball to each other. During the film, a man in a gorilla costume walks into the middle of the action and stays visible on the screen for about five seconds. One group of subjects is asked to count the number of passes among the players; the other group is simply asked to watch the film. Incredibly, 56% of the subjects who count the passes don't ever see the gorilla. Of course, everyone asked to simply watch the film notices the gorilla man on the basketball court.

The point is that the brain is a kind of search engine: a Googler of reality. If we program our search to look for passes among basketball players, that's the output we receive from the brain. What is extraneous to our search (gorillas) is eliminated. When we conduct a broad search, we receive a wider range of outputs. Focused searches work well if we're looking for a specific item, such as lost car keys. They don't work so well when we need to process all of the information needed to survive in an environment of risk and uncertainty.

It is very easy to approach the markets in focused search mode. We develop a hypothesis about the market (bullish or bearish) and we prime ourselves to look for certain chart patterns or indicator readings. In our haste to find what we're looking for, we can miss the gorillas in the middle of the market. Afterwords, we might look back on market action and think, "How in the *&#@ could I have missed that??!!"

Gonzales writes, "The practice of Zen teaches that it is impossible to add anything more to a cup that is already full. If you pour in more tea, it simply spills over and is wasted. The same is true of the mind. A closed attitude, an attitude that says, 'I already know', may cause you to miss important information. Zen teaches openness. Survival instructors refer to that quality of openness as 'humility'. In my experience, elite performers, such as high-angle rescue professionals, who risk their lives to save others, have an exceptional balance of boldness and humility..." (p. 91).

There is a concise formula for trading success: boldness and humility. The boldness to act on what you see with the conviction, and the humility to realize that what you see may not be all that is there.

Notice how so many of the excellent market bloggers--Charles Kirk and Trader Mike come readily to mind--track a variety of sectors and indices, examining the market from multiple angles. They're not just looking for the passes on the basketball court; they want to make sure they're not missing any gorillas in the picture.

It's those gorillas in the middle of the market that we don't see that can catch us when we're lacking Gonzales' humility.

Oh, and by the way, did you know that, in yesterday's market, 917 stocks trading above $10 a share made 20-day highs and only 258 made new lows? But, among stocks trading under $10 a share, 199 made new 20-day highs and 241 made new lows.

How easy it is to miss those gorillas.