24 January 2009

'Black Swan Test:' big losers, right or left brains?

ARROYO GRANDE, Calif. (MarketWatch) -- Yes, there's a test. We call it the "Black Swan Test." It can predict your chances of making money on the next big meltdown, which will be far more damaging than the combined impact of the 2000 dot-com crash and the current subprime/banking meltdown that so far has cost American investors over $10 trillion.
The Black Swan Test will help you predict your chances of making money in what many are now reluctantly saying may turn into the Great Depression 2. Nassim Taleb, an options trader, mathematics professor and author of "Fooled By Randomness" and "The Black Swan," says "Black Swans" are rare events with three defining characteristics:
The event is highly improbable and unpredictable
It will have "massive consequences"
And, afterwards, experts invent reasons why it was predictable, not random
Taleb also implies a fourth characteristic. There are "two kinds of these rare events: the narrated Black Swans that are present in current discourse and you are likely to hear about on television, and those that nobody talks about ... that you feel ashamed discussing in public because they do not seem plausible."
Either way, whether we talk too much about a Black Swan coming or not at all, the evidence indicates that the vast majority of investors end up doing nothing in advance to protect themselves against the "massive consequences" when a Black Swan finally triggers a meltdown. And that includes "investors" like our Treasury secretary and Fed chairman, who failed the test.
If you could scan the brains of folks who fail this test you'd hear one side of their brain mumbling excuses to the other side, excuses like:
"Never saw it coming, never, it really caught me totally by surprise"
"We sort of saw it, but I guess we were in denial of the consequences"
"Yes we saw it, but we ignored the timing and underestimated its impact"
"Oh, we knew it was coming, but expected the free market to self-correct"
"Of course we all knew it was coming way back a few years ago. But we got greedy, were blinded. We were making so much money we hoped we could time it so we'd get out at the top, after making a killing, just before the music stopped, and leave other investors and the taxpayers to clean up the mess"
Since investing is a zero-sum game, with losers as well as winners, this Black Swan Test can help you predict your chances of winning and/or losing money in the next big meltdown, coming perhaps as early as 2011. The test will also expose personality traits that likely affected how much you won or lost in prior downturns and bear-recessions, and thus help you change your thinking so that you don't repeat past mistakes.
The Black Swan Test is very simple: First, you have to know whether you're primarily a left-brain thinker and decision-maker, or whether your dominant mode of thinking and decision-making is right-brained. The basis of this fascinating discovery comes from Jeremy Grantham whose GMO firm manages over $100 billion worldwide.
Right-brain? Left-brain? Whole-brain?
In recent months The Economist, Barron's, SmartMoney, as well as his October "GMO Quarterly Letter" all elaborated on Grantham's remarks that identify hemispherical thinking (left brain versus right brain) for the current massive meltdown of the global economy, as well as for all past meltdowns, and also as the predicted cause of all future meltdowns. In other words, it's imbedded in our individual and collected DNA, genes and psyche.
This is crucial for us individually, as well as the nation, as it can help predict who will be the winners and the losers in the next meltdown.
But before you jump ahead to see the analysis, take the Black Swan Test. Simply answer this question: Are you a left-brain thinker and decision-maker or right-brainer? You probably already have an idea right off the top of your head, based on prior psychological personality tests. Most of us had to take them in school, the military, job interviews ... so write it down, right now. You can change it later after thinking about it.
You're probably also thinking: "I have some of both traits," that you're "whole-brained." In fact, we all are, to some degree. Several years ago I wrote a book on personality testing, "The Millionaire Code," using the 16 Myers-Briggs personality types for career and investing. And yes, all our brains are switch-hitters ... some of the time.
Bottom line: One side secretly dominates
But the truth is, most people do have one mode of thinking and decision-making which controls and dominates your brain-functions ... when the chips are down ... when the pressure is on ... when your goals are challenged ... when a lot of money is at stake ... when your values and principles are compromised ... when your family's threatened.
So please take a close look at the traits of these two personality types. Then take the Black Swan Test. Which fits you best, remembering that it isn't either/or, black-or-white, but rather which best describes that part of your brain that dominates and "runs the show" most often? Here are the choices and characteristics: Left-brain personality traits Right-brain personality traits
Logical, rational, math, science, reality-based, facts, details, objective, ordered, knowledge, strategies, rules, pattern-seeking, analytical, practical, safety, systems, focuses on the present, the past, the near-term ... Intuitive, philosophical, gut feelings, subjective, alternatives, possibilities, meaning, creativity, imagination, images and symbols, impetuous, focuses on the present, the future, the big picture, the long-term ...

Which comes into play when making business decisions, in family budgeting, investment strategies, what and how you buy, sell, trade? Which dominates how you think and make decisions: Is it your left-brain, or does your right-brain run the show?
Okay, why does all this matter? How will this choice help predict the next meltdown and bear-recession? And what does it tell us about the past, the dot-com crash and today's subprime-credit meltdown? More importantly, what does your answer to this "Black Swan Test" say about your chances of winning or losing when the next big one hits?
Grantham channels the next big Black Swan
Here's Grantham's fascinating analysis from a Barron's interview a few months ago: "Why is it that several dozen people saw this crisis coming for years? I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even Treasury Secretary [Henry] Paulson and Fed Chairman [Ben] Bernanke, none of them seemed to see it coming."
Our government and banking leaders are "management types who focus on what they are doing this quarter or this annual budget are somewhat impatient." However, "seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained, but we end up with an army of left-brained immediate doers. So it's more or less guaranteed that every time we get an outlying, obscure event," a Black Swan, "that has never happened before in history, they are always going to miss it. And the three or four dozen odd characters screaming about it are always going to be ignored."
For emphasis, let's repeat the key facts here so you can commit them to memory as a guide to your thinking and decision-making in the near future:
Many experts did predict and warn of prior meltdowns, years in advance
America's banks and government are dominated by left-brain decision-makers
These left-brain business and financial types focus on the short-term trades, quarterly earnings and discount the long-term historical perspective
Consequently, it's virtually certain that America's leadership will always miss the next Black Swan event because they can't see the next big hit coming
Warnings from the right-brain minority will always be dismissed and ignored during every bull/bear investment cycle and every future recession/recovery cycle
If you are a left-brain thinker you will miscalculate the timing/impact of the next meltdown, the next big collapse coming, the next Black Swan. Therefore, your assets and investments will be at great risk of suffering "massive consequences," which, on a subconscious level, you already know are "predictable, not random." As a result of your denial, you will not take necessary steps to protect your assets.
If you're a right-brain thinker, your longer-term historical view will better arm you and your family for the next Black Swan and, therefore, give you a better chance of emerging as a winner during the Great Depression 2 that follows.

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