One of the most disturbing things about the 1978 Jonestown massacre was that many of the victims knew they were committing suicide. Apparently there were practice runs. People didn’t know if the Kool-Aid was poisoned or not. It was a test of commitment.
Students of human psychology—which all investors should be—would do well to remember this.
Obviously, when people become so wedded to an idea that it becomes dogma they will not question, bad things can happen. What’s less obvious is that any idea one is unwilling or unable to honestly reconsider poses the same threat.
As Will Rogers said, “It isn’t what we don’t know that gives us trouble, it’s what we know that ain’t so.”
This is a common human propensity. It requires constant vigilance to avoid falling victim to our own cleverness. I suspect the danger is actually greater the more intelligent the person is. Smart people know they are (even if they’re smart enough not to say so out loud), and hence tend to believe their own ideas more than those of others. This makes them especially vulnerable to believing their own BS—and drinking the Kool-Aid.
That’s bad enough, but then we have also to consider the guru factor…
Remember when Bitcoin was screaming up toward $20,000, and a gaggle of Bitcoin gurus were telling us that it had to go on to $100,000—or $1 million? They weren’t just crazies frothing at the mouth. They were very smart people making strong cases that were very persuasive. Worst of all, as I recall, most weren’t urging people to wait for a major correction to present a buying opportunity, but urging people to pile in.
“We have The Truth and if you don’t do as we say, you’re not one of us who have the commitment it takes to get to financial heaven,” they said, holding out their cups of digital, poison Kool-Aid.
To be fair, I remember the same type of poison-investment Kool-Aid being peddled by some esteemed gold bugs in 2011 when gold topped $1,900.
And there were people making arguments with perfectly straight faces as to why uranium had to keep rising after screaming up from $7 to $140.
So I’m not just bashing Bitcoin here. It’s true that I have no confidence in any of the valuation arguments I’ve seen for it, but I think it’s great to see the market taking on the government monopoly on money. I sincerely hope the crypto revolution will be a smashing success. Literally.
The critical point is that very clever gurus who reinforce our ideas tend to fix those ideas in our minds, making them resistant to contradictory data and us vulnerable to huge mistakes.
That includes me.
To be honest, of all the mistakes I’ve made in my career, I think that not warning my readers more forcefully to brace for a gold correction in 2011 was the worst. I do remember writing that the blistering ride up to $1,900 was too much, too fast. I’m sure I never said gold had to keep rising to the $5,000–$10,000 figures some were predicting. But given all I knew was true about government money-printing and such, I did believe that any correction we saw then would be short-lived. I believed the arguments. I believed in my own cleverness.
I drank the Kool-Aid… and I’ll never forget the bitter taste.
This is why I refuse to join the prediction racket so many other financial writers engage in.
Instead, I tell readers what I think and try to lay out all the outcomes. I always cover ways in which I might be wrong. For instance, I went to great lengths to point out the near-term risks in my article yesterday on the silver breakout.
And I never pretend that I know what the Fed will do, what the price of gold will be, what exploration drilling must turn up—nor any other thing only a working crystal ball could tell us.
But I have learned a great deal from my mistakes. I’m not afraid to call a trend and say what I’m doing with my own money. This way, everyone can see that I’ll suffer the consequences personally if I do make the wrong bet.
Why bother you with all this philosophizing today?
Because I see so many financial predictions circulating online. I see this among the talking heads on financial media—but also among clearly intelligent investors on social media. Maybe it’s just me, but the record run on Wall Street seems to have ramped the prediction racket up to high gear.
This has very practical consequences.
We should all remember that we’re vulnerable to financial Kool-Aid peddlers—especially those who tell us what we want to hear.
We should question all who offer us guidance, myself included. I won’t try to fool you, but I can be wrong.
And the more we agree with those who offer us guidance, the higher the standards of skepticism we should apply to what they say. The better that Kool-Aid looks, the more suspicious we should be of it.
But ultimately the gurus don’t force us to drink anything. We make that choice ourselves.
This makes being skeptical of our own fixed ideas the most vital discipline of all.
By this I don’t mean some sort of medieval, groveling self-abasement.
I mean that we should have the integrity to question our own most cherished ideas.
Failure in this vital task means we may drink our own Kool-Aid, resulting in the massacre of our own portfolios.
I’m being as straight with you as I can on this, because I really do think this is absolutely essential.
Thursday, July 18, 4:33pm, EDT, 2019