From Magee's General Semantics of Wall Street

[DbPhoenix 42]

Jones buys 100 shares of Fruehauf Trailer at 24. He will tell you with all the enthusiasm of the true believer what a fine company Fruehauf is, and what excellent prospects they have for the coming 12 months. He will tell you everything he knows that is good about the stock, but he will not tell you anything that is bad. For him there is no bad. His mind is made up. He does not want to be confused with facts. He is not looking for the truth; he has found it. And like a politician or a minister or a trial lawyer, he is not trying to see reality as it is. He is trying to keep himself convinced that his map of Fruehauf is actually a good one. He wants to hear nothing that will upset his all-out judgment.

 

What he wants and needs is argument to bolster his shaky judgment and make him feel a little more secure. Therefore, he will not read, or he will forget, anything that appears in the Wall Street Journal that threatens his faith that Fruehauf is all good. And he will clip and treasure the favorable comments or reports that tend to show that he was in fact right. The data he collects are no doubt true, but they present a very one-sided picture.

 

Suppose, now, that Fruehauf stock sells off to 18. Will he re-examine the territory and see whether there have been essential changes in the situation “out there”? Or will he, more often than not, cling to the old map of his original opinion and simply go on a search for more evidence to confirm his rightness in that opinion? He may even buy another hundred shares on the basis that if his original conclusion was valid, then this new purchase will lower the average cost of all the shares he owns, so that even a moderate advance would put him back in the profit column.

 

What is he doing? Is he making an impartial evaluation of a stock? Or is he defending his obsolete opinion in the face of present facts? Is he acting in a way that is likely to make him profits? Or is he setting a higher value on being right than on the money involved.

 

Let Fruehauf drop to $12 a share. Will this man sell now? No. It would hurt too much to sell. Who would it hurt? Why, it would hurt him, of course. How would it hurt him? Well, it would mean a loss in money. But isn’t it clear that the larger loss is not measured in dollars, but in pride? It will hurt less to sweep the facts under the rug, delude one’s self, and maintain that one was right in the beginning and is right still, than it will to admit that one was a fool. To put it another way: If he has decid-ed, “The stock is worth $60 a share,” and the market says $12 a share, then the market must be wrong. For the sacred map cannot be wrong. It would hurt too much.

 

Call it fantasy, prejudice, opinion, judgment, or what you will, when the high abstraction collides with bare facts, it is the facts that have to give way if your value system places such a high premium on rightness that your tender ego cannot suffer the slightest setback. Many men cannot afford to take monetary losses in the market, not because of the money itself so much as because of their oversensitive, poorly-trained selves. The humiliation would be unbearable.

 

The only way that occurs to such men to prevent such painful situations is to strive to be always or nearly always right. If by study and extreme care they could avoid making mistakes, they would not be exposed to the hard necessity of having to take humiliating losses over and over again. And so? And so, too often, rather than settle for a relatively minor loss, our friend will stand firmly on the deck of his first judgment, and will go down with the ship. The history of Wall Street, and of LaSalle Street, too, is studded with the stories of men who refused to be wrong and who ended up ruined, with only the tattered shreds of their false pride left to them for consolation.

 

How to avoid such unnecessary tragedies? Be always right? You know that isn’t possible. Keep away from the speculative market entirely? That is one answer, but it’s rather like burning down the barn to get rid of the rats.

 

There are other answers, and they are simple. They are standing there, right at hand, like elephants in the front hall, if we can only see them. In the first place, there is no rule that we can’t change our minds. It’s not necessarily wrong or a mistake to believe that Fruehauf stock will go up from $24 to $60. What is wrong is sticking to the opinion after the evidence clearly shows that the conditions have changed. The rational approach is to be ready at all times to consider new evidence, and to revise the map accordingly.

 

In the second place, it need not hurt so much to have to change one’s mind. Unless we are so wedded to absolute standards that we cannot entertain anything that will conflict with what we decided in the first place, we can alter the map to any degree we want, or completely reverse our position. If we have a good method of evaluation, in which we have confidence on the basis of observed and verified results, we will not have to think of these changes of opinion as defeats. They are simply part of the process of keeping our maps up to date. If we plan to travel to Boston over Route 20 and there is construction underway on a five-mile section of the route, we don’t try to blast our way through. We take the detour. We go by the territory as it now is, not by the old map. And if the road is blocked entirely and no detour possible, we don’t shoot ourselves, or run our car over a cliff; we simply turn around and go back home and try again tomorrow.

 

It is perfectly amazing how many losses you can take in the market and not get hurt very much, provided you are able to cut these losses short as soon as a change of trend appears. In order to do that, you will have to keep an open mind—not open just to favorable things that confirm what you wanted to believe in the first place, but open to any reports that will have a bearing on the situation, whether good or bad.

 

The really serious losses come when someone closes his mind and stubbornly refuses to recognize new factors in the situation. Of course, it’s not enough merely to keep losses small. In order to keep solvent, one must also have some profits; but profits, too, bring their psychological woes.