One of my heroes in this industry is Richard Russell, the legendary publisher of Dow Theory Letters.  I don’t always agree with what Ol’ Russell has to say, but the respect I have for him is immeasurable.  He’s been writing about the markets for over 50 years.  He does it because he loves it.  I love writing about the markets too and I hope to still be doing it 50 years from now.

He was also a child of the Depression.  There aren’t many of those left.  The perspectives that these rare individuals have — not just on the financial markets, but on life – are fascinating and valuable.  I’ve never met Richard Russell personally, but I could probably talk to him for days straight.  There’s so much to ask.  So much to learn from our elders like him.  Watching all this experiential wisdom slowly, inevitably disappear into the fog of history always makes me a little sad.

Anyway.  It was through Russell’s writings that I learned one of the most important lessons one can learn about investing: Listen to the markets.

Listening is Hard

It’s not entirely natural and the process of listening feels progressively less natural the more self-interested the individual.  Every human being is self-interested to a certain degree, and the difficulty we have listening to other people is one of the things we all have in common.  It’s more difficult for some than others.  But it’s hard for each of us.

Good listening is also a philosophical principle that we can all agree on.  Every last one of us understands on at least some level that, yes, it’s important to be a good listener and it’s important that we all work harder at it.  It requires tremendous patience, discipline, and most importantly, an open mind.  Good listening is about the slow, careful process of climbing inside inside someone else’s shoes.

Bias is the enemy of listening.  If you want to be a good listener, you have to understand bias — not just your own bias, but the bias of he who is speaking to you.  When dealing with other humans, it’s tricky to ferret out and eliminate this.  It’s hard to listen to a drug addict or a convicted murderer tell their story without some sort of naturally negative judgment.  What they say may sound completely different after it’s run through your personal filters.  Personal bias is a big reason why all sorts of content winds up getting misinterpreted.

And it’s also hard to get the real message when whoever you’re listening to is severely biased.  When listening to the electronics store salesman talk about purchasing an extended warranty, you may get hung up on the superficial details of the benefits.  But if you understand his bias (he gets a huge commission if you purchase one) before you listen to his pitch, it’s a lot easier to extract the real message.

Listening can go awry in a lot of other places.  The granddaddy communication model in social science is the Shannon-Weaver Model.  A message is developed, encoded, sent (where it may be affected by noise), decoded, and then interpreted by the recipient.

Look at all the places where the true content of the message can get messed up.

Listening to the markets isn’t any different than listening to your wife, your parents, or your kids.  It’s no different than listening to radio broadcast.

It starts by knowing the language.  You can’t listen without knowing the vocabulary.  The financial industry is full of jargon.  It gets a bad reputation.  But this is an inevitable, impermeable aspect of the industry.  If you want to listen to another English speaker, you have to learn English.  If you want to listen to the investment markets, you have to learn the unique language.  Under the Shannon-Weaver model, if you don’t have the tools to decode the message, you’ll never be able to properly interpret it.

But listening to the financial markets carries an extra layer of difficulty.  The problem is that it can’t listen to you.  It doesn’t care.

The market is like your crazy Uncle Al who just rants and rants and rants at Thanksgiving dinner and couldn’t possibly have any less interest in your opinions or those of the rest of the family.  Crazy Uncle Al is a nut.  He never combs his hair and smells strange — not bad, but strange.  You tolerate him politely and you do it by pouring another three fingers of scotch and tuning him out.  Everybody snickers about crazy Uncle Al behind his back.  What a loon!

The problem is that you can’t tune the market out.  Not if you want to make money.  Not if you want to keep your investment portfolio from rolling over a landmine.  You have to sit there and listen.  You can’t just nod politely, either.  You have to actively listen to crazy Uncle Al.  You have to understand what he is saying and why.  And you have to make peace with the fact that the exchange is totally one sided.

Because it’s crazy Uncle Al who sets the terms.  Not you.  It doesn’t matter if you agree with him or not.  It’s not a conversation with Uncle Al.  It doesn’t matter what you think.  The only thing that matters is if you can understand what he is saying.  He holds all the cards.

As I said, it’s hard work.  But if you can pull it off, crazy Uncle Al will tell you where the landmines are.  He’ll tell you how to make money.

Buried within Uncle Al’s crazy ramblings are the signals for what you should do and when you should do it.

Once you adopt this philosophy of listening, all the other pieces will fall into place.

From there you can start to build the proper psychology for investing.  You can train your brain how to do the things it needs to do set itself up for success.

You can start developing tactics and strategies.  The success of every tactic and every strategy is contingent upon properly understanding the environment.  That’s impossible to do without knowing how to listen.

You can even get a better night’s sleep.

You can do all that and more.  But first, you have to listen.

Paul Gauguin - Eve. Don't Listen to the Liar