A successful investor uses his or her higher level brain functions to make rational and informed decisions. Decisions on what, when and how to buy, sell or hold. This seems like a very simple statement, and easily can be brushed aside. But in reality its a very complex decision, in a very complex market, in a very complex world.
Given the complexity and difficulty in making a rational decision, using the Pareto principle, 9,900 out of every 10,000 effectively abrogate that decision making to their lower levels of brain function. That being fight or flight. Which are largely automatic reactions, from very ancient parts of the brain, which existed many millions of years ago, and still exist today. The brain is like an onion, with the more recent evolutionary higher level and rational parts, on the outside of the onion. The lower level primordial parts are in the inner core.
So here we have a very complex market within a very complex world, where most are making investment decisions using their primordial brain function, and not the higher levels which have evolved in more recent times, that is the last one million years.
What this means is that herd is not rational in any way, shape or form. The 9,900 out of every 10,000….or the 999,000 out of every 1 million market participants, are totally irrational, as decisions are made primarily using very low level brain functions. Fight or flight, designed to survive, in a primordial existence.
Except ….. that is NOT the environment we are investing in. Its highly complex and highly inter related. No super computer will ever model it, and why I believe the central banks are fooling themselves, and every one else. The markets and economy are simply so complex they cannot be modeled. And also why Hal, developed by Martin Armstrong, to “predict everything” is a fools god.
And this explains most of what occurs in the markets, especially with respect to volatility, violent sell offs, impulsive price moves, etc. You can see it in the charts, in particular the shorter time scales. Longer term, they tend to get absorbed, as the rational minority have more influence, and the fight or flight reactions get absorbed in all the noise.
Its important to understand this if one wishes to be a successful investor in the longer term. And also use this knowledge to control one’s own primordial brain function, when making decisions in these complex markets. Its almost like we have two brains. What I try and do is use the higher level brain to look over what I am doing and saying “Why are you doing or thinking of doing that”, almost like an internal discussion between the higher level brain and the lower level, in order to arrive at a rational decision, based on important facts and evidence at hand. Not a fight or flight reactive decision, which in most cases is the wrong move.