Table Of ContentThe Psychology
and Philosophy of
Successful Investing
WALL STREET
WINNING THE
MENTAL GAME
on
St. Lucie Press
Boca Raton • London • New York • Washington, D.C.
JOHN MAGEE
Edited by W.H.C. Bassetti
The Psychology
and Philosophy of
Successful Investing
WALL STREET
WINNING THE
MENTAL GAME
on
JOHN MAGEE INVESTMENT SERIES
Library of Congress Cataloging-in-Publication Data
Magee, John, 1901–1987
Winning the mental game on Wall Street : the psychology and philosophy of
successful investing / by John Magee ; edited and revised by W.H.C. Bassetti.
p. cm. — (John Magee investment series)
Rev. ed. of: General semantics of Wall Street. 1st ed. 1958.
Includes index.
ISBN 0-910944-17-2
1. Stocks. I. Bassetti, W. H. C. II. Title: General semantics of Wall Street.
III. Title. IV. Series.
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TABLE OF CONTENTS
Foreword
Preface
Chapter
1
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Wall Street is a metaphor whose abstractions represent far more
than finances to most people.
2
THE BIG GAME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
While Wall Street might appear to be a big game, it is an eco-
nomic mechanism of great basic importance and integrity.
3
BLACK MAGIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The black magic investors see in the market happens in their
own minds.
4
THE VILLAIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Blaming a villain is the first thing the novice does. In reality,
what he is doing is paying tuition to the more experienced
players.
5
THE BLIND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Most of us start our investment careers in a state of unaware-
ness verging on blindness.
6
OUT OF THE DARKNESS. . . . . . . . . . . . . . . . . . . . . . . . 21
Men and women are blank slates in darkness until, like Helen
Keller, we are educated and our eyes are opened.
7
THE CAMERA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
When we begin our education, we are like little cameras,
recording all data without much analysis.
8
THE PRIMARY RECEPTORS. . . . . . . . . . . . . . . . . . . . . 29
As we become more aware, we realize that our minds function
like cameras and that what our sense organs record is not in the
mind but “out there.”
9
A STARTING POINT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Inferior to animals in many ways, man is superior in that he can
study and learn in a conscious way.
10
ONE-TO-ONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Our minds make maps of external reality. When the maps are
perfect, they have a one-to-one relationship with the mapped
object.
11
OF MAPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Maps exist in different degrees of detail—and levels of abstrac-
tion. The extent to which they reflect the actual contents of the
territory depends on the level.
12
DATING THE MAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Maps must bear a date if we are to determine their relevance;
the most recent date is usually the most useful.
13
BRINGING DATA UP-TO-DATE. . . . . . . . . . . . . . . . . . . 51
A map of IBM in 1950 would be different from a map of IBM
in 2000. The relevant piece of the map—the price—would have
to be updated.
14
THE 26 LEAD SOLDIERS . . . . . . . . . . . . . . . . . . . . . . . . 53
The 26 letters of the alphabet and their use in the printed word
have enabled man to communicate his maps and about maps.
15
MAPS OF MAPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Men can make maps of maps—that is, they can symbolize and
create successively higher levels of category and abstraction.
16
THE PIGEONHOLES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
The use of pigeonholes—labels—can lead to conflict when
people attach different significance to them.
17
THE LABELS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
The degree of abstraction of the label must be carefully noted:
“Office Papers” will not identify invoice #10002.
18
NOT QUITE THE SAME . . . . . . . . . . . . . . . . . . . . . . . . . 71
Except in theory no thing is the same as any other thing—ball
bearings, anything. And the thing today will be different from
itself tomorrow.
Winning the Mental Game on Wall Street
19
UP AND DOWN THE LADDER. . . . . . . . . . . . . . . . . . . . 73
We should use a map with the level of detail we need, high
order or low order.
20
SIMILARITIES—AND DIFFERENCES . . . . . . . . . . . . . 75
A close-up picture will reveal the differences between members
of a class. The farther back we get, the more we see similarities
rather than differences.
21
BEYOND THE WORLD OF THINGS. . . . . . . . . . . . . . . 81
Maps of concepts (“good”) or adjectives (“red”) are subjective
and not confirmable.
22
THE MEANINGS WE ATTACH TO MAPS . . . . . . . . . . 89
Meanings are personal and not debatable with respect to
opinion or taste, and may be demonstrably false to fact.
23
MAPS WITHOUT TERRITORIES . . . . . . . . . . . . . . . . . 93
Some symbols or maps have no verifiable territory: “God,”
“eternal verities,” “good.”
24
AN EXCEEDINGLY COMPLEX MACHINE . . . . . . . . . 97
At the second millennium the brain remains the most complex
and marvelous of nature’s phenomena.
25
LAYERS OF AWARENESS. . . . . . . . . . . . . . . . . . . . . . . 103
Our awareness of reality varies from detailed and accurate
observation to inculcation of cultural maps without examina-
tion.
26
TIME BINDING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Time binding is what Korzybski called the ability of man to
learn from the writings of men long dead.
27
STOP! LOOK! LISTEN! . . . . . . . . . . . . . . . . . . . . . . . . . 115
Before we accept the sacred teachings and maps of the past as
valid, we need to examine them dispassionately.
28
CONTRADICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Our tendency is to accept established authority (and its maps)
over current experience. Aware investors will note the contradic-
tion.
29
LET’S NOT BE TOO ANTHROPOCENTRIC . . . . . . . 133
High-order abstractions (God) are not measurable. To avoid dis-
pute, mutual agreement must be found on definitions.
Table of Contents
30
SANITY MUST BE ACHIEVED . . . . . . . . . . . . . . . . . . 137
Accept unexamined the teachings of our culture and you get un-
sanity. To achieve sanity, you must learn to see what is.
31
THE THINKING PROCESS. . . . . . . . . . . . . . . . . . . . . . 141
Learn to follow the indoctrination path; learn to think
analytically, discriminating obsolete maps and symbols from
current reality.
32
THE VAGUENESS OF THE HIGH ABSTRACTIONS. 147
High-order abstractions like success take on the meaning given
them by the user. They are subjective.
33
“TO ME” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
To discriminate the objective from the subjective—e.g., “This
is evil”—just add “to me” (or “to him”).
34
EITHER/OR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Simplistic thinking leads us to think in terms of only two solu-
tions, either black or white.
35
THE DANGEROUS NATURE OF DICHOTOMY . . . . 159
Especially in emotional either/or choices (success/failure), we
should stop to examine the gradations of gray between black
and white.
36
THREE-VALUED ORIENTATION . . . . . . . . . . . . . . . . 163
The ability to consider three outcomes rather than two
(either/or) allows us to examine more alternatives.
37
MULTI-VALUED SYSTEMS . . . . . . . . . . . . . . . . . . . . . 167
Beyond two and three-value decision systems lies the
possibility of considering outcomes of greater variety.
38
INFINITE-VALUED SYSTEMS . . . . . . . . . . . . . . . . . . . 171
Beyond simple limited-value systems lies infinite value—a
multiplicity of outcomes.
39
THE GREEKS HAD A PHRASE FOR IT . . . . . . . . . . . 175
Nothing in excess, and measure in all things, said the Greeks,
reflecting an ability to maintain perspective and consider a
scale of many values.
40
IMPERFECT INFORMATION . . . . . . . . . . . . . . . . . . . 183
Most of the information we get, whether in life or in the market,
is imperfect. We can grieve over being right/wrong or accept
it and manage it
Winning the Mental Game on Wall Street
41
WHY DOES IT HURT SO MUCH? . . . . . . . . . . . . . . . . 189
The greatest injury is not to the pocketbook but to the self-
esteem, which too often is tied to the pocketbook. Losses
damage self-esteem.
42
PROFITS CAN BE PAINFUL, TOO . . . . . . . . . . . . . . . 197
Profits can be painful when collecting them has not been
perfect—when the event has not been perfectly managed, when
we missed the top or the bottom.
43
PREDICTING THE FUTURE . . . . . . . . . . . . . . . . . . . . 201
A perfect prediction of the future is not necessary for market
profitability (or life contentment). Allowing for uncertainty
and imperfection, all that is necessary is “necessary and
sufficient” accuracy.
44
THE METHOD OF PREDICTION . . . . . . . . . . . . . . . . 203
Study the past. Find a basis for predicting the future. Test it on
past data. Test it on actual data. Find an acceptable level of
efficiency.
45
HUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
A rowed boat zigs and zags back and forth as the rower keeps
correcting his course. So do systems looking for homeostasis.
So do markets hunting for fair market price.
46
POSITIVE FEEDBACK . . . . . . . . . . . . . . . . . . . . . . . . . 213
When a mechanism does not correct itself but flies out of
control, it is said to experience positive feedback.
47
WHAT IS “VALUE”? . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
Value, like beauty, is in the eye of the beholder—because it is
a high-order abstraction.
48
ASKING THE RIGHT QUESTIONS . . . . . . . . . . . . . . . 227
Some questions are worth asking, others are not. Learning the
distinction can lead to profitable living.
49
TWO PRACTICAL QUESTIONS FOR
EVERYDAY USE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
Many meaningless statements may be reduced to rubble by
asking “Is that so?” and “How do you know that?”
50
BALDERDASH, UNLIMITED . . . . . . . . . . . . . . . . . . . . 239
You can gather so much data that it obscures your search for
meaning, especially in the market. Technicians attempt to strip
away balderdash and get to observable facts.
Table of Contents
51
WE CAN’T GET IT ALL . . . . . . . . . . . . . . . . . . . . . . . . 245
Getting all the data is not only impossible it’s impractical. What
we need is the information necessary and sufficient for our
purposes.
52
THE TRUTH, THE WHOLE TRUTH, AND NOTHING
BUT THE TRUTH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
In order to deal with the unending search for absolutes, we
develop a capacity for selective inattention. Awareness can
allow us to deal with absolutes with more flexibility.
53
INTERLUDE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Pay no attention to that man behind the curtain. It’s just John
Magee being the author.
54
DATED DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
Our culture will enthusiastically give us dated maps—precepts,
directives, values—of no earthly use. Aware investors will
examine them and determine if the map is out of date or still
useful.
55
“BUY GOOD, SOUND STOCKS” . . . . . . . . . . . . . . . . . 259
Buying sound stocks is certainly recommended. Being married
to them while they become unsound is a failure to update the
map.
56
“I AM INTERESTED ONLY IN INCOME” . . . . . . . . . 265
Any investor who focuses solely on one aspect of a stock, such
as income, will soon discover he has watched the wrong shell
in the shell game. Equity marked to market is what’s important.
57
“BUT STILL I INSIST ON MY DIVIDENDS” . . . . . . . 269
“Dividends” is another wand to watch while the magician pulls
the rabbit from the hat. There is little difference in the long run
between dividend-paying and non-dividend stocks.
58
PUT THEM AWAY IN THE BOX AND
FORGET THEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
Putting stocks away in the box and forgetting them is the same
as not putting oil in your car.
59
THAT OLD DEVIL MARGIN . . . . . . . . . . . . . . . . . . . . 277
Margin—a dangerous word. You would never buy stock on
margin. But would you pay cash for a house?
Winning the Mental Game on Wall Street
60
NOT JUST A MARKET OF STOCKS . . . . . . . . . . . . . . 281
The market doesn’t tell us just about stocks. It tells us
about the value of the dollar and of the exchange rates of
things for money.
61
CORRELATIONS AND CAUSES . . . . . . . . . . . . . . . . . 285
Unsophisticated investors look for the causes of market action.
Sophisticated investors look for correlations.
62
THE “FUNDAMENTALS” . . . . . . . . . . . . . . . . . . . . . . . 293
Book value, earnings, capitalization, research, spending cash
flow, natal horoscope—technicians don’t care about fundamen-
tals. They care about observed facts, price, and volume.
63
ACCRUED VS. REALIZED . . . . . . . . . . . . . . . . . . . . . . 297
Realized gains and losses—tracking only them and not
marking your portfolio to market is another way to invest
foolishly.
64
UP IS BETTER THAN DOWN. . . . . . . . . . . . . . . . . . . . 303
Human nature inclines us to think that up is better than down,
so the unskillful investor will die before he shorts a stock.
65
THE UP-AND-DOWN OF IT . . . . . . . . . . . . . . . . . . . . . 311
Perhaps instead of thinking in terms of dollars per share, we
should think in terms of shares per dollar—whether dollars or
shares are being measured.
66
POLITICS AND ECONOMICS . . . . . . . . . . . . . . . . . . . 315
Demagogues (politicians) enjoy the benefits of free markets,
and also the benefits of being able to scourge speculators and
windfall profiteers, according to political necessity.
67
A VARIETY OF DEVICES . . . . . . . . . . . . . . . . . . . . . . . 321
Many methods or systems will profit in the market. There is no
fail-safe method, and nothing replaces intelligent observation
and practical experience.
68
CAN ANY MAN PREDICT THE FUTURE? . . . . . . . . . 327
No one predicts the future, yet we all do. Wise investors
develop methods for predicting probabilities and evaluate them
on a measurable scale.
69
THE METHOD OF EVALUATION . . . . . . . . . . . . . . . . 333
In order to understand any complex situation or game—or mar-
ket—we must be able to stand back, analyze, draw conclusions,
and generalize.
Table of Contents
70
BUILDING THE METHOD . . . . . . . . . . . . . . . . . . . . . . 337
Observation of the particular is followed by analysis, which
leads to hypothesis and synthesis.
71
THE METHOD IS BUILT FROM THE
BARE BONES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
Technicians strip information to its objective bones—price and
volume—and create an abstraction called a chart that enables
them to analyze probabilities and make decisions free of the
fundamental clutter.
72
PUTTING THE METHOD TO WORK . . . . . . . . . . . . . 345
General semantics is concerned with the maintenance of
external facts (“out there”) and internal abstractions (“in here”)
on a current basis so that the practitioner may invest and live
more efficiently.
73
HABIT CAN BE A PITFALL . . . . . . . . . . . . . . . . . . . . . 347
Man is a creature of habit and will persist in unproductive
habits until he is shocked into or trained to change.
74
CHAIN AND FLASH REACTIONS. . . . . . . . . . . . . . . . 351
Never be in a hurry to do something stupid.
75
NUMBERS CAN BE PITFALLS . . . . . . . . . . . . . . . . . . 353
The difference between a 10 percent gain on a $10 stock and
on a $100 stock is not expressed arithmetically. Think
logarithmically.
76
THE WONDERFUL CURVES . . . . . . . . . . . . . . . . . . . . 357
Sunflowers! Fractals! Nautilus shells! Symmetry is the wonder
of growth—and compound interest.
77
LOSSES CAN BE PITFALLS. . . . . . . . . . . . . . . . . . . . . 361
When losses are taken personally, it is the psyche that suffers,
not just the portfolio.
78
PROFITS CAN BE PITFALLS. . . . . . . . . . . . . . . . . . . . 365
When profits become a surrogate for validation of the self, the
psyche will again suffer.
79
COMMON SENSE CAN BE A PITFALL . . . . . . . . . . . 369
Common sense makes just enough sense to be dangerous.
80
THE PIG WATCHERS . . . . . . . . . . . . . . . . . . . . . . . . . . 373
Watching the market is like watching the tip of a pole tied to
the back of an unseen pig.
Winning the Mental Game on Wall Street
81
THE LIMITS OF PREDICTION . . . . . . . . . . . . . . . . . . 377
Probabilities and predictions are fraught with uncertainty, and
our operations and methodology must take that into account.
82
IS THE MARKET A GAME? . . . . . . . . . . . . . . . . . . . . . 383
The market is a game in many senses, the most important of
which is that we may use gaming theory to study it.
83
THE PURELY MATHEMATICAL ODDS . . . . . . . . . . . 387
Studying the odds in fair games and unfair games can teach the
investor much about preparing his methodology for use in the
market.
84
THE STRATEGY OF YOUR OPPONENT . . . . . . . . . . 391
In the market, the market itself is your opponent. Its intent is to
win.
85
THE PAYOFF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
Attempting to make the big killing can result in a big killing—
of the gambler attempting it. The prospect of great gains
involves great risks, which usually lead to great losses.
86
FRACTIONIZING VS. MAXIMIZING . . . . . . . . . . . . . 403
Rather than attempting to maximize gains at great risk, we opt
to minimize our risks, resulting in fractionized gains.
87
ACCENTUATE THE NEGATIVE . . . . . . . . . . . . . . . . . 409
A realistic approach to the market accentuates the negative, i.e.,
it worries about risk first and makes plans for setbacks and
losses.
88
NET LONG-TERM GAINS . . . . . . . . . . . . . . . . . . . . . . 413
A methodical approach to the market, taking all things in good
measure and maintaining proportion in all things, allows us to
reap the true long-term gains of the market, and life.
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419
Table of Contents
PREFACE
This has been a particularly hard book to write. I have found it much
harder in some ways than my part of Technical Analysis of Stock Trends.
It has been two years in actual preparation, much longer than that in its
preliminary shaping-up.
It is hard because the subject is both so simple and so complicated. It
is simple in that there are only a few basic points and these would be
almost self-evident to a child if he were not already conditioned to a great
many preconceptions. It is complicated because these preconceptions
include a great number of the teachings every person receives early in
life. Some, perhaps most, of this teaching is factual and useful. But min-
gled with it are the legacies of all the prescientific theories, the ancient
philosophies, and the theologies, that have come down through the ages.
And the mixture of custom, ethics, hypothesis, precept, morality, disci-
pline, superstition, and directives includes a good deal that may not jibe
with the observed facts today, may even conflict with or contradict itself,
and may not be in the best interests of mankind’s development as a race
nor of a man’s individual welfare.
To make things more complicated, these customs and directives are
often clothed in the vestments of high authority. They are often present-
ed in highly colored emotional terms, as absolutes not subject to revision
or even to re-examination. Finally, as if to add further difficulties, the
structure of language itself tends to contribute to misunderstanding and
misevaluation unless that structure and its relation to our thinking is well
understood.
There have been a good many books written on the subject of gener-
al semantics, some of them far more profound than this one. This partic-
ular book was built around the problems of a little cosmos that in many
