3. CAN INK BLOTS TELL YOU WHETHER YOU ARE THE TYPE WHO WILL MAKE A LOT OF MONEY IN THE MARKET?

The social scientists may be too busy reconstructing Vietnamese society along their own lines to pursue the elusive Australopithecus of a market animal, but one psychologist of my acquaintance has at least begun to ask some questions and to make the first hypotheses. The hypotheses are not on mass psychology but on individual psychology, so we will have to come back to the crowd in the next chapter. Some of my Boston fund-managing friends put me onto Dr. Charles McArthur at Harvard, since their funds were using him as a consultant to scout out prospective security analysts. Usually Dr. McArthur sits in the splendid Jose Maria Sert building testing Harvard students, and then a couple of the Bostonians figured that if you could spot a dropout with multiple choices and ink blots, maybe the same thing would work for money men. One thing led to another, and now Dr. McArthur spends part of his time firing ink blots at guys who think they can manage a hundred million dollars.

That is how I found myself slicing into the horse steak at lunches at the Harvard Faculty Club. If the President ever appoints you liaison to the intelligentsia or if you find yourself at the Harvard Faculty Club for any other reason, you will be well advised to order the horse steak. That shows you are one of us. The horse steak has been on the menu since the World War II meat shortages, and the Harvard cognoscenti, always alert for new taste thrills, found it gamier and more interesting than plain old cow steak, especially when washed down with an amusing little Australian Pinot Chardonnay. So it stays on the menu, a permanent fixture. Horse steak is the symbol of the open, questing mind, which is how Harvard likes to think of itself.

Anyway, Dr. McArthur is slicing his way through his own horse steak, modestly pointing out that his samples are too small to be sure. That means if he published this as a scholarly paper with a colon in the middle of the title, the academic psychologists and social scientists might jump all over him. They would probably jump all over him anyway for the very idea of searching for anything so sordid as the type of personality that makes money. Money is anathema in the groves of Academe unless it comes from foundations or the Government, especially the Government.

One thing Dr. McArthur’s probings outline is that there is a personality difference between the people who are good at finding stocks and the people who call the shots on the timing and manage the whole portfolio. Security analysts dog down information and come up with an idea about what should be bought or sold, but they do not necessarily make good conductors for the whole orchestra. If they are woodwind players to start, they tend to hear the whole orchestra as woodwinds, and it takes another type to keep the woodwinds and brasses and strings in line.

How is a good security analyst spotted? The first thing the testers give you—and the potential conductor too—is a Strong test, named after the Stanford psychologist who devised it. Somewhere along the line you have already taken a vocational preference test, so this one will be familiar to you. It is designed to tell you what you like, just in case you have been conning yourself. The questions are multiple choice, like this:

Tomorrow is a holiday, and you can do anything you want. Would you rather

a) fly an airplane

b) read a book

c) catch up on some sleep

d) go down to your neighborhood tavern and mix it up with the boys

e) work in your garden cutting flowers

That’s the kind of thing. When the test gets going, you can really get involved.

An expedition is announced to explore the dangerous upper reaches of the Amazon, where piranha fish rule in the water and vicious headhunters on land. Would you rather

a) lead the expedition

b) raise the money for this scientific endeavor

c) go along and write up the story when you get back

d) just as soon not go

You see yourself leading an expedition up the Amazon? That may seem pretty glamorous, but maybe you have dangerous fantasies and almost certainly you are going to get an itchy bottom sitting at a desk reading stock market reports. If you pick c, we might let you write our weekly stock market letter, but you had better be able to do some other things, too.

You are coming home from a party, and you are having a fight with your wife. The fight is about

a) what time you finally got her to leave

b) how much she (you) had to drink

c) what she was (you were) doing with that fellow (lady) on the couch

d) money

e) the children

In this fight, it is more efficient to

a) say nothing and let her talk herself out

b) make sure she understands your point of view, for her own good

c) establish who runs things, quickly and firmly

d) keep peace any way you can

If you wanted to leave before your wife did, if she had more to drink than is good for her, if the fight was about money and the children, you are right along with 81.1 percent of all our testees, and welcome to our organization. You do know better than your wife and you want to be sure she understands that and we like that attitude here.

Preference tests have been given for years and by now they have revealed patterns—on punched cards, at that—which group various occupations together. Analysts end up in Groups V and IX on the Strong test. Group V is social services, telling people what to do for their own good. Group IX is sales, extroverted, common sensical, and “people-centered atheoretical.” It won’t do you any good to dig up the good idea if you can’t put it across.

The portfolio manager is another animal, currently in the process of escaping from Group VIII, office detail. Portfolio managers used to have the same sort of profile as a CPA, because portfolio managers were usually trust officers, safe, sound Prudent Men who wore green eyeshades, sleeve garters, and said “My good man.” But the really swinging managers, portfolio as personality, out running super-aggressive funds, have profiles much more like the entrepreneurs who like to get an idea, round up people, and start a business or a project. The trust officer portfolio manager tolerates detail; the aggressive fund manager can barely stand it. All portfolio managers are supposed to be physically vigorous, but the aggressive portfolio managers play squash, tennis, and row, so that they don’t have to be on anybody’s team. Presumably the CPA-type manager would run best on a relay team or play soccer, or do something where the whole team would be in on the scoring. (The new, itchy, aggressive manager is a breed lately arrived. We do not have much of a dossier on him and we will come back to him in a later chapter.)

Other tests with pen and pencil peel away other veils. John has four apples, Mary has three oranges, and they both get on a train that is going forty miles an hour which left the station at 2:10. When the train arrives, John has two apples and Mary has six oranges. What time is it?

The analyst is inductive. He will break the problem into its components and work away at each, building up to the answer. The old portfolio manager will settle happily into the problem; he loves it. The aggressive portfolio manager says, “What the hell kind of stupid question is that, and how is that going to make me any money?” and goes into the same kind of rage he did when his wife wouldn’t leave the party. He has to get the Concept in one fell swoop or he is very restless.

While the analysts can do the problems, they make a lot of arithmetic errors, unlike the accountants, who get everything right to the decimal point. But good analysts have high aptitude with both words and numbers. They shine best in Vocabulary. It is when the functioning gets abstract, both numerically and verbally, that they begin to fade.

Everybody in the whole field is very smart. The bottom IQ is 130, so if you’re dumb, better stop right here—all the other people are too bright. The range is from bright to near-genius. Are you ready for the blot? A sample blot is on the next page.

What do you see in the blot? How many things did you see? Is it the whole blot, or only part of the blot? How quickly did you see it?

If it will make you feel any better, a lot of other people have seen those bugs, animal hides, and outstretched hands. But you have to do better than that, since you are only seeing what everybody else sees. You had better find something of your own within the first twenty seconds.

The point of the blots is not what you see in the blots, but your response pattern to them. How high is your evidence demand? That is, how much do you have to see before you will commit yourself?

Again the analyst is building inductively, but the real gunslinger of a portfolio manager can’t stand second thoughts. He bounces with the stimulus, is enthusiastic, almost overresponds. The analyst really wants to be right, his ego needs the pleasure of being right, and he would almost rather be right than make money. The aggressive portfolio manager doesn’t really care about being right on each judgment, as long as he wins when you tot up the score. He has to be right more than wrong, naturally, but he tends to go in white-hot streaks and hope that his decisions add up more right—and so weighted—than wrong. What he is really doing is testing—quickly and unconsciously—each stimulus against the “apperceptive mass” of his own intuition, his intuition including all the “cognitive perception” he has used for years.

This portrait of an aggressive portfolio manager is not one that will make ancient trustees in paneled board rooms feel secure. But, as we have said, there are not many such; the portrait is really of a handful of hedge fund and mutual-fund managers, not that of trust officers or the managers of large institutions.

These performance-oriented managers are new enough that their game is still on trial, but they have already weathered some of the bumps. What distinguishes this kind of investing—the quick reaction to the information—from that of the small investor who hears a tip and rushes out and buys? The small investor has the reaction without the knowledge. He has no “aperceptive mass” behind the reaction; the portfolio manager, quite simply, can remember the profit margins of a hundred companies, how the stocks react to a variety of situations, and where in the spectrum of managers he himself fits. If he knows these things, he can be away from the market and still know where its rhythm and his are meshing. In short, if you really know what’s going on, you don’t even have to know what’s going on to know what’s going on. All you need is a hell of an aperceptive mass, an IQ of 150, and a dollop of ESP, and you can ignore the headlines, because you anticipated them months ago.

There is one requirement that is absolute in money managing, and you have already learned it with the first Irregular Rule: If you don’t know who you are, this is an expensive place to find out. The requirement is emotional maturity.

“You have to use your emotions in a useful way,” says Dr. McArthur. “Your emotions must support the goal you’re after. You can’t have any conflict about what you’re after, and your emotional needs must be gratified by succeeding at what you’re doing. In short, you have to be able to handle any situation without losing your cool, or letting your emotions take over. You must operate without anxiety.”

The psychological tests can’t really tell you whether you are going to be an ace at making money; they are descriptions of existing groups, some of them followed up with later tests for incumbency (how long in the job), contentment, and success. You may be out of the patterns and still succeed, or the world may change to the point where these are not the successful patterns. But given the world as it is, this is the way the Game goes. Some analysts should not manage their own money, some portfolio managers should be running funds with other characteristics, and some investors should be cutting flowers in their garden and letting smart people run the money.

You may even come out a fine fellow on tests, but the real test is how you behave when the crowd is roaring the other way. We know a little about some individual types, but the crowd, the elusive Australopithecus, is still largely an unknown, an exercise in mass psychology still not accomplished. But is the market really a crowd?