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Monkey See, Monkey Do

Where are the monkeys now? They seem to be riding the India Boom 2005-06-07…(?) The flood of monkeys, including foreign monkeys, continues unabated

What we call a 'brain' is actually 4 distinct compartments. At the most primeval is our spine, which controls our body functions, the automated responses (also called reflexes). This part does not 'learn' anything, which is why our reflexes don't change, regardless of fresh information. So we can't hold back a blink, even when we want to. Most important, this is the part which houses our 'survival instinct', so important to market behaviour.

Money is like a hunt. Our primeval instincts see this as part of our 'survival instinct', which is why we have this aversion to losing money (part of our 'hunter-gatherer' instinct). This explains 'greed', why men tend to be prone to be driven by greed. The underlying belief is that 'hunt' (ie, money) is scarce and we cannot predict when we will get it again. The spine has been with us since we turned into vertebrates, ie, when we were still alligators.

The Medulla Cerebellum (which sits on the base of the brain, at the top of the spine) was the next development, when we turned into monkeys. We were still hunters, but we now had a well-developed 'social need' that allowed us to hunt in packs and share the kill. Common Cause was bigger than the Individual Good. Organisations and Institutions are built on this instinct. The two fore lobes came last. These are what make us human. 'Thinking' is resident in this part of the brain, the logical (processing) part in the Left Brain and the Emotive (feeling) part in the Right Brain. As far as markets are concerned, these parts are RAMs (ie, Random Access Memories), which can be erased quite easily. This is a major functional flaw, as far as markets are concerned.

The ROMs (ie, Read Only Memories) are based in the Medulla and the Spine. These compartments speak with a much louder voice than the fore lobes. That is at the root of most irrational behaviour seen in markets. First, investors are unable to figure out just which part of their brain is speaking up, and when…so this is the cause of much trouble with the majority of the population.

Just knowing this will help you deal with this, at least at a personal level. But this column is (unfortunately) neither read (nor understood) by the entire investing community. That should be good for those who do (read and understand my column). You must have heard of that common (market) saying: "Fear is a bigger emotion than Greed". This is because when the Spine speaks up, everything else shuts down. Similarly, when 'herding' (which comes from our "monkeyness" in the Medulla) kicks in, it takes great training and self-discipline to keep your Left & Right Brains working.

I sympathise with those who could not get out of the IT Boom 2000. They were actually good monkeys, which is what nature meant them to be. I must be a bad monkey, to have actually shorted DSQ, when all the monkeys were riding the wave…the stock was amongst the most heavily traded stocks of the time.

Where are the monkeys now? They seem to be riding the India Boom 2005-06-07…(?) The flood of monkeys, including foreign monkeys, continues unabated. People WANT to believe…manufacturing stocks at 6, 8, 10 times Book Value will deliver returns at a 20% Cost of Capital. That assumes an RONW of near 100%, but no matter…everybody is doing it!

We are "long-term players"! We are "in it for 3 years"! We buy never to sell! We want a "piece of India"! Every time I hear the Institutions say this, I tend to mentally insert a "monkey" after the "we"!

Why doesn't the Medulla learn? Well, that's for Nature (or God, depending on your religious beliefs) to answer…for me, suffice it to say that it doesn't and will not, at least over my foreseeable future (ie, about 40 years). I believe a great company can be built around this simple insight…my company, which will someday be taken public in a bear market (because I want non-monkeys on board).

Will the institutions invest into such an IPO? Imagine saying in your prospectus: "for the purpose of selling over-valued shares, real estate, commodities, forex and derivatives to monkeys". In fact, selling anything that monkeys need, anytime, anywhere…!

A leading bank brokerage that I trade with, refused to buy on my behalf on Panic Monday (17th May, was it?). It seems mine was the ONLY Buy trade logged in, and I had said "buy the whole market" for my given stocks…their Risk Management people called from Mumbai to hold up my order. With full cash SHOWING in their books (they could see my Bank Account electronically), they still held up my trade out of "concern for my safety"…my Buy orders would have delivered 30% return IN A DAY…!

You mean with the best Risk Management in the country, they could not have figured out that a SINGLE customer (albeit HNI) was worth the Risk…or were they smart enough to be buying the entire market themselves?!

Don't even bother…there are never any complex (read 'contrarian') answers to Institutional behaviour. The Principle of Institutional Stupidity (expostulated in a previous column) ensures that decision-making in times of crisis flows down to the Lowest Common Denominator (LCD)…which in this case, could be the respective Spines of the most monkey-ish of the (Risk) Committee members!

There are many, many behaviour patterns that come from 'monkeyness'. Look at our very predictable responses to a sudden rush of 'power' (which includes money as one of its forms). Over-confidence (another result of 'power') is commonly seen in large companies; so is 'selective perception'…also called "Confirmation Bias"! Almost all the known Irrationalities can be traced to 'monkeyness'. Emotional Intelligence (as defined in the books) is nothing but the ability to control your Monkeyness. Almost every cliché: from "keeping up with the Joneses" to "the Boss is always right" can be traced to our Monkeyness.

Almost every precept I have heard in Investing Philosophy (ie, the greats like Peter Lynch, Warren Buffet, Charlie Munger, Phil Fisher, et al) is nothing but the inversion of Monkeyness. The simple documentation of patterns of Monkeyness (and their subsequent inversion) will lead to the creation of a brilliant investor. I have been doing this for some time…and I need to write a book, as soon as I can get off writing columns!

Serious readers need to internalize this concept. I have a mental image of monkeys…suddenly, when a pin-striped Investment Banker is talking to me with his presentation, I see his face morph into a monkey. My mental image of markets is of "masses of monkeys" first running helter-skelter in one direction, then running (equally helter, if not skelter) in the other direction!

Markets at least have a self-correcting mechanism to punish Monkeyness. In most other walks of life (like Politics, Industry, Management, Academics, Media), Monkeyness takes on very transparently aggressive forms. If there is one thing worse than a monkey, it is a "Monkey-In-Power" (MIP). This mutant specie is largely in evidence at that most elegant of kitty parties, the CII…industrialists pontificating on stuff, the media lapping it all up to bring it all to your Living Room…from monkey to monkey to you, dear reader...the last in the line of monkeys!

Well, Happy New Year, dear monkeys, in this Year Of The Cat (is it?)! Remember, Cats hunt alone, they wash themselves well and they have nine lives…you will need every one of them in the markets in 2006!