Thursday, April 12, 2018

Book Review #34: The Tao Jones Averages: Author: Bennett W Goodspeed

The book 'The Tao Jones Averages: A Guide to Whole-Brained Investing', written by Bennett W Goodspeed promised to give me a different perspective on investing. It did not much.

Human brain consists of two hemispheres, the left hemisphere that is analytical, deductive and logical and the right hemisphere that is artistic, creative and intuitive. The author's point was that while the markets always behaved non-rationally (right brained), the traditional analysts approached the market with a rational approach,  focusing mostly on the analytical part of their brain. By focusing on hard numbers - the trend, growth projection, DCF, financials etc - they were missing the potential of half of the brain. And they (the analysts) were wiser post-facto. They were good at explaining 'why an event happened as it did' and 'why they couldn't have anticipated it'.

As per the author, by using the potential of both the hemispheres while making the investing decision, you can make better investment decisions. The right brain will help one 'sense' changes to market conditions, before they actually happened. Sounded logical

In this Book Review series, I have been reviewing (this is the 34th book) books on investing, mostly about the approaches followed by the masters of investing. All of them tended to focus on the left hemisphere of the brain. All of them explained how you can do fundamental analysis, how to use numbers to identify value etc.

I was nearing the saturation point and was beginning to feel that I have got all the knowledge I needed for investment analysis and any new book that I read will only cement the existing knowledge that I possessed.

That is when this book arrived on the horizon. Dealing with a different approach, this sounded interesting.

I am a right brained person. I use a lot of intuition in my decision making and have found that intuitive decisions 'worked out in the end', as Tao says. So it was with a lot of anticipation that I opened this book.

In the first few pages, the book referred to another book named 'Tao of Pooh', by Benjamin Hoff. I understood that to make a sense out of this book, I needed to first read that book. So I downloaded and read that book first. You can read the review of that book HERE

The first half of this book (TJA) meanders along, covering two key areas, one, why wall street analysts are wrong and two, the principles of Tao. I am not clear why entire pages on a book on investing are spend on explaining the difference between Taoism, Confucianism and Buddhism.

By applying male (yang) logic to to the market's female (yin) behaviour, professional investors are often guilty of 'trying to understand running water by catching it in a bucket'. One challenge of the fundamental analysis is that it is based on the available data as provided by company management. They are ineffective in dealing with 'soft data', which is non-quantifiable and based on perceptions.

The right brain deals with 'sensing'. This is the process of seeing unrelated information and making an assessment related to a different area. The author gives a couple of examples. One of them relates to 'Saudi Box'. An analyst found that Saudi Arabia had reduced the sized of the containers that arrives in its ports and started checking every container. Only explanation was that the country was fearing an arms insurrection. The analyst sensed that in this situation, the key people will start accumulating gold. He purchased gold at about 300 an ounce and in a couple of months, sold it off at about 600 per ounce. 

The author spends time on decision making analysis. There are five stages to decision making. These are intelligence, information transference, design, approval and implementation. Intelligence is the process of collection and synthesis of information. Information transference occurs when take the derived information for further analysis. While intelligence develops questions, design activity is an analytic search to find answers and map out possible strategies. Alternatives are identified and send to management for approval. Once approved, the decision is implemented.

Among the above stages, intelligence and information transference are mostly related to the right brain the remaining are left brain activities. 

Author talks about Tao Investors, who 'sense' the changes taking place in the environment very early in the cycle and take advantage of the outcome. He gives multiple examples. Jim Rogers observed that in the 6 Day War, Egyptian forces were getting significant victories due to superior technology of Soviet equipment. He sensed that US will put in a lot of money to augment its technology. Based on this he invested heavily in low-priced technology companies in US and his investments returned 20 times in a span of about two years !!

Seeing Egypt winning in the war with Israel and linking it to US technology investments is right brain activity. It is a synthesis of information from one area to be used in another area, which is again the work of right brain.

The most important part of this book is the discussion on Hermann indicator.

Hermann indicator is a test to identify your hemispherical dominance. Each hemisphere has a lower (limbic) and upper (cerebral) aspect. The dominance of a cerebral left and a limbic right (facts / feelings or logical / emotional) or a limbic left and a cerebral right (experimental / control) is the most difficult profile for successful investing. The individuals with such profiles tend to be inconsistent in which mode they use. Their brain halves tend to compete rather than compromise. 

Since experimental  and control functions cannot occur at the same time, investors with such profiles will oscillate between modes. For example, if the experimental part dominates a decision that proves wrong, the control part will have a higher say the next time. On the other hand, if the risks taken by experimental mode pays off, the chances are that the investor will take even more risk. 

The way to handle this is to use more facts and feelings which opposes the experimental / control impulses.

Investing is a two part function. Feelings tend to precede logic, so that the intuitive right brain develops the questions and the left supplies the answers. Knowing one's dominant hemisphere should serve as a confidence builder for investing. If you are left brained, logically dominated, you should have the confidence that you can develop investment skills by learning more about the logical elements of investment game. Conversely  and intuitive right-brainer should learn to trust his or her instincts and judgement. 

When making investment decisions, it is advisable to stop and ask which side of your brain is running with the ball. Is it logical? Does it feel right? Is there a clash between the two? In case of a clash, it is better to defer a decision and bring about a balance between the two hemispheres. Logical investors need to observe the law of reverse effort. When a decision is logically very compelling, it is better to sleep on it for a day or two for the right brain to come up with its opinion. 

The four enemies a person must overcome to become a 'man of knowledge' (wise investor). The first enemy is fear. If a man gets scared and runs away, he will not invest and will not learn. You never learn unless you are a player. 

Fear is overcome by clarity, which becomes the second enemy. Clarity of mind dispels fear, but it also blinds. It gives you the false confidence. You must use your clarity only to see, and wait patiently and measure carefully before you take the next step. In investment, clarity is almost always an illusion.

One who overcomes clarity possesses the third enemy, power. One who is defeated by this enemy will not know how to handle it. To conquer power, you have to defy it deliberately. You must understand the way of the universe, that power can come and go. Like trained martial artists, you should use your power very rarely. 

The fourth enemy to overcome to become a wise investor is old age, where you must resist the unyielding desire to rest. In investing old age refers to the day you stop learning and questioning. It refers to taking ridiculous investment decisions, for example, selling a good investment to avoid paying LTCG.

The Chinese word for 'crisis' means both danger and opportunity. Those who sense change very early stages will tend to have the most bountiful harvest. This sensitivity is a key part of investment game. 

The book decks up the key ideas with stories and a few jokes. It ends with the investment alphabet, a set of 26 advises for an investor, corresponding to 26 letters of the alphabet. A few of them are, be a light sleeper - believe in the wisdom of insecurity, do not be too sure - be questioning, value the art of selling etc. A complete list is the subject of another post.

I cannot say that I am a wiser investor after reading this book. There are only a few concepts or ideas that I learned from it. I will give it a rating of  3 / 5.

Buy the book Tao Jones Averages @Amazon

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