The Mind of the Market: Spiritual Lessons for the Active Investor

Rating:
Summary: More than money
Review: "The ability to accept unpleasant truths and, at the same time, respond decisively is the hallmark of a great investor." Chu tells us in Mind of the Market, his essay on the psychology of investments and the history of the markets. Chu - a money manager, civic leader and former Wall Street investment banker - advances some unusual, well-informed and intruiging idea. Unfortunately, he doesn't fully apply his own concepts.

Chu enlightens us with notions such as "living to accumulate more money suggests that we are somewhat empty and incomplete, dependent on some external activity or substance to give us meaning." Chu also advocates trading with Zen-like detachment from short-term consequences. AS a money manager, I can attest to his wisdom.

Yet Mind of the Market doesn't face the unpleasant and unprofitable truth about the unfettered free market. Chu contends the existing market gives participants an opportunity to "lift themselves off their knees and to walk out of the darkness towards the sunlight." Although he admits a "small minority" doesn't have access to self-advancement (a "flaw" of a market economy), other people simply "whine about their unequal status." After all, unequal status is the market's incentive for production.

Chu's celebration of the unfettered free market ignores the huge number of souls who don't have proper nutrition, let alone capital to invest. This "flaw" is no more inevitable than it is tolerable, for there is nothing in the concept of a market economy that requires that purchasing power and opportunity be highly concentrated rather than widely distributed. While I agree with Chu's claim that unequal status motivates people, the important question is how much inequality is enought to motivate people.

Poverty is not a popular concern these days, and raising questions about distribution of wealth won't help anyone's career on Wall Street or in politics. But unflinching intellectual honesty can raise one's spiritual standing. Chu could teach the world some important lessons if only he would rethink Wall Street's advice to let capital be capital. As Chu himself says, "Few individuals have the nerve to stand outside the crowd. Indeed, to go against the crowd successfully is the hallmark of greatness...[Capitalism] humiliates those who defensively cling to the status quo."

Rating:
Summary: Misleading
Review: "The ability to accept unpleasant truths and, at the same time, respond decisively is the hallmark of a great investor." Chu tells us in Mind of the Market, his essay on the psychology of investments and the history of the markets. Chu - a money manager, civic leader and former Wall Street investment banker - advances some unusual, well-informed and intruiging idea. Unfortunately, he doesn't fully apply his own concepts.

Chu enlightens us with notions such as "living to accumulate more money suggests that we are somewhat empty and incomplete, dependent on some external activity or substance to give us meaning." Chu also advocates trading with Zen-like detachment from short-term consequences. AS a money manager, I can attest to his wisdom.

Yet Mind of the Market doesn't face the unpleasant and unprofitable truth about the unfettered free market. Chu contends the existing market gives participants an opportunity to "lift themselves off their knees and to walk out of the darkness towards the sunlight." Although he admits a "small minority" doesn't have access to self-advancement (a "flaw" of a market economy), other people simply "whine about their unequal status." After all, unequal status is the market's incentive for production.

Chu's celebration of the unfettered free market ignores the huge number of souls who don't have proper nutrition, let alone capital to invest. This "flaw" is no more inevitable than it is tolerable, for there is nothing in the concept of a market economy that requires that purchasing power and opportunity be highly concentrated rather than widely distributed. While I agree with Chu's claim that unequal status motivates people, the important question is how much inequality is enought to motivate people.

Poverty is not a popular concern these days, and raising questions about distribution of wealth won't help anyone's career on Wall Street or in politics. But unflinching intellectual honesty can raise one's spiritual standing. Chu could teach the world some important lessons if only he would rethink Wall Street's advice to let capital be capital. As Chu himself says, "Few individuals have the nerve to stand outside the crowd. Indeed, to go against the crowd successfully is the hallmark of greatness...[Capitalism] humiliates those who defensively cling to the status quo."

Rating:
Summary: A Truly Original Masterpiece
Review: I read many dozens of books every year, and I found this one to be a remarkable standout. I've never read anything quite like it, and I'm recommending it to my friends. I'm deeply impressed by the author's holistic approach to the market, the way he sees it as being not apart from life but an intrinsic part of it, and the way it so helpfully and so brilliantly identifies the psychological imperatives of the market vis-a-vis the individual investor.

Chu's book offers no cheesy "get-rich-quick" schemes and, like the spirit of Zen, is paradoxically frequently highly abstract yet eminently practical. It helps the individual to identify his own hopes, fears, and preconceptions about the market so that he can become a more effective participant in it. Like Marcus Aurelius's "Meditations", Epictetus's Handbook, and T.S. Eliot's "Four Quartets" it's just one of those books to place at your bedside to open up before going to sleep to try to imbibe its wisdom until it becomes second nature. If that's not the definition of a classic, then I don't know what is.

After reading through the book once I find that I can open it up randomly and find paragraphs that provide ample fodder for meditation. For example:


"As the price of a stock rises, it attracts a small following which brings attention to the positive attributes of that stock. As the underlying economic fundamentals improve, analysts raise earnings estimates. This boosts the confidence of those who already own the stock, causing them to bolster their holdings; at the same time, potential investors treat this as positive confirmation of a promising investment and commence buying, pushing up the price even more. Momentum players who jump on stocks with rising prices accelerate the price rises even more. They are truly engaged in an exercise in mass psychology, trying to anticipate crowd behavior better than the crowd itself, engaging in what 'random walk' economist Burton Malkiel calls the 'castle-in-the-air' theory of stock valuation, alternatively known as the 'greater fool' theory. Finally, steady rises in price over a period of time make the majority of investors, at the margin, buy the stock in a self-fufilling belief that the stock can only rise. At its extreme, investors literally throw money at the market causing the explosive upsurges in price that one sees in times of euphoria. This is a very emotional time when irrational behavior predominates and fundamental research becomes temporarily irrelevant.

"Naturally, this snowballing process ends, as it always does, setting the stage for either a protracted sideward trading range or a decline. The cyclical nature of this investment decision-making process means that often the best long-term investment decisions appear wrong at the time that they are made. This is because the largest percentage increase in stock price is made possible at the moment of maximum negativity, when most holders of a stock want to dump it for whatever the market will bear. It is always, only in retrospect, when the buyer at the trough of the stock price cycle is proven to be prescient, if and when the stock price recovers significantly. Stock prices are always propelled to extremes at both ends of the cycle. Crowds become too optimistic about the future as prices rise, and then too pessimistic as prices fall. Sharp gaps in price movements indicate an emotional climax that signals a turning point in crowd psychology.

"Fear and greed outweigh rational analysis in every investment decision. The market price, as defined by a liquid auction market, reflects the ongoing struggle between the forces of supply and demand, which in turn is determined by a set of complex variables that resists precise quantification. However, all the conflicting opinions and valuations of the worth of a stock at any given point in time are filtered through the emotional consensus of fear and greed. Greed begins when stocks go up that one does not own; then envy sets in when one's peers own stocks that are outperforming one's own. Group contagion forces prices higher because people want to keep in step with their peers. The same motivation for security and belonging that drives people into groups in the first place also drives stock prices to an eventual top. In the reverse, stock price declines trigger fear, betrayal at the paucity of one's own judgment, and paralysis or self-recrimination as prices fall even further. At the climax, faith and reason are thrown to the wind when the stock is finally sold. Finally, the hapless investor joins the stampede."


This is concise, sensible, and brilliant, and is the best description of the boom-and-bust mentality of the market that I'm aware of. In fact, this book is so good that I honestly think it can be life-changing.

Mr. Chu's book was published in 1999. Careful readers of it at the time would have been able to avoid the subsequent carnage of the dotcom bustup which he obviously knew was coming!


Rating:
Summary: FINALLY- THE TRUTH
Review: It took a spiritual concept from the East to put a moral and high-minded face on the stock market. F.J.Chu has brought his knowledge and practice of Zen and martial arts, along with a broad background in Western philosophy and psychology, to bear in this superb series of lessons.

Both professional and private investors, as well as wannabe market participants, can benefit from this book if they are open to a real learning experience that comes from a thoughtful, reflective and analytical reading.

The history of the U.S. stock market is made clear and understandable, even though the author says, "The history of the stock market is the history of forgetting." Chu is encouraging us not to forget. Outstanding writings such as Adam Smith's "The Wealth of Nations" which explains the invisible hand of allowing us to have fair prices on goods and services, and the works of John Maynard Keynes are put into perspective.

The author observes that the financial markets keep corporations and nations in line every single day by "marking them to market." Corporations' greatest taskmaster is the stock market - much more than regulators, managers and directors, and the market for their products and services.

Chu employs pithy epigrams and aphorisms from Albert Einstein, Warren Buffet, J.K. Gailbraith and others for every chapter title. They are all thought provoking and relevant. He also outlines prerequisites for beating the market. But don't expect a pat formula. The author's suggestions have more to do with patience, when not to be in the market, and avoiding weakness in one's emotional and mental state. There is an enlightening and detailed elaboration on each bull and bear market of the 20th century, with very helpful discourse on how one might look around the corner to the next major market movement. And hang on to your hat, he has some interesting thoughts.

"The most uncelebrated and misunderstood aspect of free market capitalism is its morality. Capitalism demands discipline,hard work and frugality. It preaches giving more to the system - via investment - than one takes out. It focuses the purpose and energies of a society toward productive enterprise. Finally, capitalism celebrates the wonderful diversity of individual talent and resolve. It reallocates capital to the daring; it rewards the industrious; but it punishes the indolent; and it humiliates those who cling defensively to the status quo." This is one of the more spiritual messages one could find in a book on the stock market.

"The Mind of the Market" says that "the markets rest on an intricate theory of sin that recognizes the human tendency towards depravity and evil but attempts to draw from it its creative potential. A marketplace of sinners is transformed by the virtue of reasoned self-interest into a vessel of moral productivity."

I agree, and hope that other readers can get beyond the noise and momentarily valued "how-to-beat-the-market" books and newsletters of the gurus du jour, on to a higher playing field of undersanding with Chu.

Rating:
Summary: FINALLY- THE TRUTH
Review: The author attacks the true catalyst of the market. This is not the usual "How To" book about the market, rather a refreshing and coherent look at the foundation of the market.

Rating:
Summary: Misleading
Review: This book is not much about the psychology of the market. In fact most of the text is changes in corporate finance over the years, boom/bust periods as in "madness of crowds". Lots of market history. There is no investing method per se, as stated in one review. It can be summed up as: trade with the trend, cut you losses, don't bet too much on one stock, and money goes where it is treated best. The market psychology is the same thing in other books.

Because of the high praise this book recieved I was expecting some new insights or a different perspective on market psychology. Here it failed miserably. Pass on this one.