Don't Fall For It

CHAPTER 11Type II Charlatan

In all speculative episodes there is always an element of pride in discovering what is seemingly new and greatly rewarding in the way of financial instrument or investment opportunity.

—John Kenneth Galbraith

Frogs have almost 360-degree vision because their necks can’t move much. When a frog’s vision works in concert with their appetite it can produce some strange reactions. Put a dead fly on a string and dangle it in front of a hungry frog and it won’t eat it. The frog is almost entirely unaware the fly exists. But put a live fly in the same room as a hungry frog and the frog will do everything in its power to pursue its prey. You see a frog’s eyesight works in such a way that they can only see certain objects when they’re moving. If it’s not moving, it doesn’t even register to the frog.^[1]

Financial markets work much in the same way when it comes to triggering the human brain to pay attention. The slow, methodical, long-term movements in the stock market aren’t exciting so it basically registers as a nonevent. It’s much easier to notice the high-flying stock or fad investment du jour that moves quickly in the short term. Those quick moves are what cause investors to overreact and make mistakes causing people to make short-term decisions with long-term capital at stake. The biggest difference between us and the frogs is they have more discipline to wait it out when the dead fly is dangling in front of their face than we do. Stability almost acts ...