symphonies, did not endear her to her traditionally mindedbosses; and she was being eased out the door. Finally, she quit without anysource of income in sight. It might have been a tragedy except for the fact thatshe now had the freedom to collaborate with me in writing columns she considered worthwhile.We both were sick of seeing investors leaning on the wrong foot so often.The mumbo jumbo constantly fed to investors was painful to us, and we bothhad a reason and the knowledge to do something about it.
To Overwhelming Applause“Get out of here!” was a typical reaction when we started writing. Reader afterreader wrote in to say that this was the most ridiculous thing in the world: aguy who had lost everything writing columns to tell other people what to do.
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One of the first letters we received suggested that instead of writing a column,I should be working as a dishwasher to pay my investors back.Here are representative responses that came in early 2002, after wewarned investors against blindly following those who believe “the trend isyour friend”:Let me conclude by encouraging you to continue writing your column on MSNMoney and sharing your thoughts with us. A good way to trade profitably seemsto be to take the opposite side of your trades.This is probably one of the worst articles I have ever read. Keep sending the samemessage to the sheep, leading them to the slaughterhouse. Vic used to be one ofthe best money managers in the world . . . guess that’s why he is peddling stockadvice on MSNBC. Give me a break.It’s very clear why you blew out your account.I find it interesting that a man who lost $125 million in one day and skipped outon the bill has a job giving out advice to investors.My thinking is that you guys are some comedy act. Show me your actual tradefigures over the past five years. I hear you went belly up. I don’t think many trendtraders did.All I can say is, how many times has Niederhoffer gone belly up and had to beghis friends to pony up some cash for him to start trading again? (from the TurtleTrader Web site).Last time I checked, Niederhoffer was not the lead investor in the Boston Red Soxownership group. John Henry is.Your articles are uncivilized, but I will forgive you if you change your life.
Some readers simply send us viruses:Subject: Fwd: Possible Virus Found in E-MailA message from: vze24cgd@verizon.net may contain a virus. This message willbe quarantined under the name vm.02285185015.10682 in the quarantine areaon host mh2dmz4.bloomberg.net.
We usually reply to the nonviral letters, and find that a soft answer turnsaway wrath. One reader, James Taylor, asked in an October 4, 2002, e-mail:Why/how are you an authority on investing? After all, you blew up your fund.
I replied:I am not an authority. I am trying to learn. I guess they figure that people trying tolearn might have an audience. Perhaps it was my education and my need of a job?
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The reader quickly wrote back:Sorry about my prior e-mail. It was rude and not fair. I was just venting because Isee so many “analysts” and so-called experts on CNBC daily, who don’t have senseto come in out of the rain.Your insight and experience can only be a great addition to the column. I dohave your book, The Education of a Speculator, and thought it was a good read.Trading is a difficult business and can test us, especially if we are aggressive.
One of the reprehensible traits of market commentators is to pretend thatthey are lonely voices in the wilderness, bereft of support and praise. Thetruth is, we are hardly bereft in that respect. Hundreds of thousands of peopleread our columns on CNBC Money each month. For every barb, we receivemany hundreds of letters of thanks. No matter what we say, some critics willinevitably say, “Forget about anything these two advise, because Vic couldn’tmake a dollar if his life depended on it.” We encourage such beliefs; they letus go about our affairs in peace. We sometimes reply to such correspondenceby saying:Yes, you’re right. Vic has been reduced to writing a column to cover the expenses of his large extended family, starting with the tuitions of his six daughters. He couldn’t get a job as an assistant squash coach because the hardballgame he used to play is extinct, so he took a job as a night watchman. The column is a good second job because he can write during the day. With any luckand continued hard work, he will be able to climb up the first stair of the investment ladder once again so that eventually he will not need to supplement his income by writing.
We do not always feel patient. A Texas economics student, responding toa column on dividends, wrote us that the 100 years of data on dividends weused wasn’t enough, and that he intended to do some real econometric workthat wasn’t so simplistic. Vic, as usual, had a mild reply: “Hopefully, you willfind a data series of relevance for more than 100 years and be able to teachus.” When the reader responded by calling Victor a name too obscene to putin print and wished us both great financial misery, Laurel became indignantand wanted to go beat him over the head with her three-inch heels.Although we may be hurt by such correspondence, we understand thatpeople have lost a great deal of money and are angry with everyone—fromCNBC to analysts to pundits and columnists.In fact, neither of us has to write for a living. The income derived fromwriting columns and books does not go far to defray our living expenses, orto pay for the databases we need to debunk the fallacies that enthrall the investing public. But for the sake of the open-minded who are interested in
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participating with us in mutual education, we are offering a serious response to the critics.Since Laurel and I began writing together in 2000, we have heard countless heartbreaking tales from readers in shock from seeing their wealth andretirement accounts cut in half or worse. People wrote to us for advice on howto rebuild, on how to live with themselves. They specifically wanted to knowhow I handled my own bout with disaster.The answer we give these distressed readers is not to avoid risk. Risk ispart of all heroic endeavors, whether in trading, business, philanthropy, construction, exploration, art, music, sports, sailing, or romance. Not only is risknecessary for gain; it is the inescapable lot of human beings. As Paul Heynewrote in The Economic Way of Thinking, “Everyone who makes a decision inthe absence of complete information about the future consequences of allavailable opportunities is a speculator. So everyone is a speculator.”5When my fund closed in 1997, the returns to that point had been suchthat most of the investors who had been with me for any length of time endedup with net profits. Since 1997, I have climbed back up the stairs. Along theway, I have made and lost millions, with the former providentially muchgreater than the latter.Avoiding risk can lead to the cynicism often produced by failure. Onephilosopher clearly saw the dangers:Cynicism may be a by-product of anomie in the social structure; at the same timeit may also prepare the way for personal anomie. . . . Anxious over a personal failure, the individual . . . often disguises his feelings with a cynical attitude, andthus negates the prize he did not attain. Frequently he includes in his cynicism allpersons who still seek that prize or have succeeded in winning it, and, occasionally, deprecates the entire social system within which the failure occurred. As thecynic becomes increasingly pessimistic and misanthropic, he finds it easier to reduce his commitment to the social system and its values.6
The author was my father. He was a cop, and he was writing about lawenforcement officers. But his words apply equally well to the forlorn state thatinvestors often fall into, especially after years of market losses.Anyone who ventures out into the thick propaganda of Wall Street risksruin. A rudder is necessary. To discover what people should understand ifthey want to improve their financial situations by trading in the market, weread hundreds of books on trading, investment, statistics, risk, and behavioralfinance. Alas, almost everything disseminated about buying stocks is promotional, and most of the advice is completely untested. Indeed, these authorsare careful not to frame their assertions in terms that can be tested.
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Irrational faith in untested propositions is a throwback to feudal times,when people lived in utter squalor and poverty and had no possibility of improving themselves, no opportunity to retire early and do creative things, nochance to find cures for disease and extend their lives. Academicstudies might seem to promise a better approach, but they often suffer from Monday-morning-quarterbacking biases and are almost always outdated by the time they are published.Just like the victims in Invasion of the Body Snatchers, the victims of investment fallacies seem perfectly normal and rational. Yet their collective behavior can lead to evil and terrifying consequences. Professional marketparasites who make their living off investors can only thrive when people givein and become unthinking pods. Only in an environment that is without skepticism and the scientific method can investors’ losses mount wildly.It all makes want us want to say, along with Dr. Bennell, “Help! Halt!Stop. Stop and listen to me! Don’t you see? They want us to be like the podpeople so that we’ll pay our dues to the market system!”In this book, Laurel and I play the roles of Becky Driscoll and Dr. Bennell,to help readers escape becoming pod creatures and succumbing to the marketfallacies replicated daily, if not hourly, by those who would take away their wallets. Laurel draws on a vast knowledge of deceptive alien techniques gainedfrom her work as U.S. stock market editor at Bloomberg News, a financialnews wire service. Unlike Dr. Bennell, who cured patients and prevented alieninvasions, I am merely a doctor of statistics. The main help such a doctor canprovide is assistance in understanding the regularities and uncertainties ofnumbers. Like Dr. Bennell, however, I am in the habit of clipping odd articlesfrom newspapers for items that might add up into grand insights somewheredown the line. For the past quarter-century, I have searched my favorite newspaper, the National Enquirer, for tales about the heroics of common people,their survival skills, and their unquenchable common sense and good nature,to fit myself for an optimistic approach to investments that roots out the podsbefore they can grow in the bearish greenhouses. We hope that readers willfind this approach profitable.Practical Speculation extends the themes that Laurel and I have been developing in our columns over the past three years. Together, we have foughtoff mysticism, hubris, and market propaganda in some 500 hard-hittingcolumns for four different Web sites. (It is true we were fired from most ofthese jobs, starting with a seven-week run of Laurel’s column at Bloombergand a two-month stand at thestreet.com, where we debuted our first joint column, “The Speculators’ Corner.” We put in a year and a month—quite a longspell for us—writing a daily column at worldlyinvestor.com, where we were
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Practical Speculation
eased out by new editors who wanted us to educate financial planners insteadof concentrating on our clarion calls to the public to beware of ballyhoo. Theodds are better than even money that by the time this book is published, wewill have been fired by our current employer, CNBC Money.We are not unmindful that we have burned many sacred cows in thisbook. None of them, or others in the barnyard and factories where they comefrom, are likely to react over kindly to the conflagration or what they are morelikely to call a mere smokescreen.One thing we should make clear, however, is that there is a wealth oforiginal material appearing in this book that has never seen the light ofday. It required much percolation, for example, for us to disclose here forthe first time the results of a content analysis of 10 years of weekly financialwriting. Same for our analysis and reformulation of the use of scattercharts, the discussions of conservation of energy, and the Value Line periodic table of elements. Furthermore, all the thoughts are fresh thoughtsrepresenting our best thinking several years into the new millennium. Theyhave evolved from our experiences on the battlefield of actual trades as wellas scholarly and practical criticism from a network of dispersed experts withknowledge and insights that could only have been assembled in modern Internet times.Through it all, our readers’ comments have augmented our work in immeasurable ways, leading to new areas of inquiry and new friendships. Aboveall, we have enjoyed the profit and pleasure of finding and testing ideas drawnfrom patterns observed in the real world, rather than passing along the received wisdom of gurus. Laurel and I hope that the lessons we have learnedover the past three years from counting, deflating propaganda, avoiding unwarranted negative thinking, and developing a proper investing foundationwill help readers of Practical Speculation prosper.
The Framework for This BookThe first part of this book—Mumbo Jumbo and Moonshine—dissects the common errors, myths, fallacies, and propaganda that induce investors to lean thewrong way and make a maximum contribution to the market’s infrastructure.Chapter 1: The MemeEveryone knew that the mere mention from a Federal Reserve chairmanof fears about stock prices would lead to an explosive and completelyunpredictable reaction in the market. Alan Greenspan’s December 5, 1996,
Introduction • The Hope Snatchers
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“irrational exuberance” speech set off such a dire chain of events that we havedevoted our Chapter 1 (with apologies to Guy de Maupassant’s classic horrortale, “The Horla”) to detailing all its consequences, including the reactionagainst technology, optimism, and growth.Chapter 2: Earnings PropagandaAs Kuhn noted in The Structure of Scientific Revolution,7 science often finds itselfin a state in which a growing number of facts conflict with prevailing theory.Such was the state of Newtonian mechanics in the late nineteenth century asexperimental evidence concerning the spontaneous decay of particles from thenucleus of atoms began to accumulate. Such is the state of today’s prevailingwisdom that stock market prices are determined by earnings or price/earningsratios. We subject the most widely accepted beliefs about the earnings-marketrelation to counting, and offer ways to spot earnings propaganda in media coverage, analyst reports, and company pronouncements to help readers rejectthe market’s numerous invitations to trade the wrong way.Chapter 3: The Hydra Heads of Technical AnalysisViolent declines in the market promote fear and dread. Being able to predictup moves in the market would guarantee immeasurable wealth and power. Itis not surprising, then, that there is a mythology of momentum, replete withstories of great heroes and heroines who have conquered the mighty forces, toease investors’ anxieties, to fuel their hopes—and to keep them making wrongmoves with no chance for improvement. We apply some science to the cult oftechnical analysis and its central mystery: “The trend is your friend.” As wedemonstrate, the trend is regrettably not your friend.Chapter 4: The Cult of the BearHow can a writer be wrong for practically his entire working life and still be themost influential figure in financial journalism? We interviewed Alan Abelsonto find out why, after searching in vain for a hint of optimism in the hundredsof weekly columns he wrote for Barron’s during the great 1990s bull market.Chapter 5: “We Are Number One” Usually Means“Not Much Longer”To the ancient Greeks, the most grievous sin was hubris, the arrogance ofpower. Vic’s father, Artie Niederhoffer, who inspired and is memorialized in
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Vic’s first book, The Education of a Speculator, wrote with great insight on howthis flaw impaired the judicial system. We attempt to carry forward his analysis by studying the effects of hubris in the marketplace.Chapter 6: Benjamin Graham: Mythical Market HeroThe ancients had their gods and demigods, and we moderns have ours. In theGolden Age of Greece, as scientific thinking took hold for the first time, somethinkers began to question the reverence and sacrifices demanded by thegods. It is always a good idea to ask questions. A figure high in today’s pantheon—Benjamin Graham—is the subject of this chapter.Chapter 7: News Flash: Computer Writes Stock Market Story!The brilliant mathematician Alan Turing once proposed that a computermight be said to be intelligent if it could fool a human into mistaking it for another human. The converse must also be true: If we can program a computerto replicate a human’s speech, we can say the human is not acting intelligently.Most contemporary financial news reports could be done by computers working from a limited database of erroneous ideas and quotes from mediocremoney managers. We explain why, and present our patented program forstock market reporting.Looking at Part Two—Practical SpeculationPart Two offers a foundation for making rational decisions about the market.Survival comes first, and we start with a strategy that will keep readers frombeing wiped out before they can enjoy the fruits of their efforts. It is based onthe thinking of one of the greatest geniuses ever in a pursuit that has demanded the best strategic thinking of sharp minds for more than a thousandyears: chess.Chapter 8: How to Avoid Spurious CorrelationsThe main tool for succeeding in the investment battle is so simple that a childcan comprehend it: the scatter plot. By plotting the joint values of two things,the investor can determine whether and how much the things are related. Thetechnique provides a way to understand almost all information about thestock market. We explain it step by step and show how to use it to analyze theeffect of interest-rate moves on the market.
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Chapter 9: The Future of ReturnsIn the twentieth century, stock markets in all major industrialized countriesrecorded returns on the order of 1,500,000 percent. That is the remarkableconclusion of three London Business School researchers who assembled amagnificent 102-year worldwide database on stock prices and wrote what weconsider the best investment book available today, Triumph of the Optimists.8We describe some systems we have developed from their database to improveon a long-term buy-and-hold strategy.Chapter 10: The Periodic Table of InvestingWe tell the story of Value Line’s beginnings from the perspectives of Sam Eisenstadt, the firm’s research chairman and Henry Hill, the Florida investor whomade millions by religiously following Value Line’s systems. The tale includesValue Line’s conclusive demonstration of growth’s superiority over value.Chapter 11: When They Swing for the Fences,We Run for the ExitsA remarkable predictive relation exists between baseball and long-term trendsin the market, and it all begins with Babe Ruth.Chapter 12: Boom or Bust?Real estate, fixed and immovable, might seem to be an ideal alternative to aroller-coaster stock market. Yet real estate investment trusts (REITs)—the mainway in which small investors can invest in large-scale income properties—havefailed to measure up to stocks as long-term investments. We demonstrate thatgreat profits may come from studying the patterns linking real estate and business cycles.Chapter 13: Market ThermodynamicsThe fundamental laws of conservation and entropy are amazingly helpful inmaking predictions in a world of seemingly constant change. We demonstratewith experiments and a day in the life of Vic’s youngest daughter, Kira.Chapter 14: Practical Market Lessons from the Tennis CourtVic has won numerous championship titles in racket sports of all kinds, andin 2001 was among the first players to be named to the newly founded Squash
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Hall of Fame. He shares strategies that have proved useful both on the courtand in the market, before, during, and after the game.Chapter 15: The Fine Art of Bargaining for an EdgeEveryone has a right to state the price he or she is willing to pay. Investorsshould not hesitate to use bargaining methods to gain an edge in themarket.Chapter 16: An Amiable Idiot in theBiotechnology RevolutionThe main criticism of Vic’s first book was that it had a lot of principles, butnothing to help people make money. When we began writing columns, wefound ourselves on the firing line every day to come up with specific recommendations. Readership of our column went up by a factor of 10 when webegan mentioning individual stock purchases and sales. Happily, although ourdedication to readers goes beyond the dollar and the clock, our stock-pickingefforts on their behalf have not been without benefit to us. We put drug stockson trial for money-making efficacy.Chapter 17: Earnings ImpostersConstantly evolving techniques of “earnings management” have made net income—once known as “the bottom line”—a chimera. We show how to mineinformation in balance sheets and cash flow statements to arrive at a truer picture of a company’s financial health. Stock buybacks, dividends, inventory, accounts receivable, and tax payments all are helpful in differentiating betweenreality and artful distortions.
Chapter 18: FinaleWe hear four questions more than any others. We explain whether we use anytechnical indicators in our trading, what book we recommend for speculators,and why we say such awful things about Alan Greenspan. We also divulge thesecret weapon that keeps us on our toes and eager to learn: a group of investors and sages we met through our columns. We communicate with themdaily by e-mail to discuss market philosophy and strategy. We include a few ofthe tens of thousands of extraordinary posts these eagles have generouslyshared over the years.
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Explanation of IconsIn this book, we return again and again to five broad themes, in highly variedforms. To help readers recognize them more easily, we highlight thesethemes with icons:Propaganda: In politics, the systematic dissemination of false beliefs is calledpropaganda. Schoolchildren nowadays are taught how to recognize the sevenmain techniques of propaganda—name-calling, glittering generalities, transfer, testimonial, plain folks, card-stacking, and bandwagon.Regrettably, nobody tells investors how to recognize these techniquesin the financial field. That is going to change right now. Propagandamethods crop up over and over again as we discuss the widespread acceptanceof false information. When we encounter these techniques, we highlight themwith the old Soviet Union’s favorite villain: the capitalist Mr. Moneybags.Untested propositions: Much of what passes for market analysistoday is done in a manner related more to Dark Ages mysticism thanscientific reasoning. When we discuss untested propositions andleaps of faith, we include our mumbo-jumbo icon, a wizard’s hat.Count, count, count: The antidote to propaganda and untested propositions isa skeptical frame of mind that asks for proof when a market-related idea is putforward. The kind of mind that queries: “Should I swallow this, or not?” AsSteve Stigler writes in his magisterial Statistics on the Table:9If a serious question has been raised, whether it be in science or society, then it isnot enough merely to assert an answer. Evidence must be provided, and that evidence should be accompanied by an assessment of its own reliability. The evidenceneed not be quantitative, although it will often find its clearest expression in quantitative form or through attempts to interpret it in quantitative form. If the question isimportant and one position has been advanced with well-considered supporting evidence, then it is incumbent on a critic to put “statistics on the table.” Clearly this testrequires more than simple number collection. It involves a careful analysis of theforces that would affect any data, methods for measuring and expressing the uncertainty of the conclusions, and conventions for settling issues such as how much uncertainty is too much, or when an assertion should be rejected and when not.
We find it appropriate to put statistics on the table often aswe try to provide an approach and a framework that will get investors off on the right foot. We use a pencil and envelope iconas a reminder of the importance of counting.
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Spurious correlations: A great part of this book is devoted to examiningrandom relations that are assumed to be predictive. When we uncover aspurious correlation, we highlight it with a pair of storks, a reference to a complex but fictitious relation between populationgrowth, bad wurst, double vision, misinterpretations of Kant’swork (unkantverstehenlassenhummels), and a jump in stork sightings in Oldenburg, Germany.Ever-changing cycles: Our job as market commentators, which has involvedwriting more than one million words over almost four years, has been to discover useful knowledge, test it, and make it general and practical. The ironicthing about knowledge is that it is constantly changing, in linewith the shifting kaleidoscope of market price moves. Ourracehorse icon highlights the law of ever-changing cycles thatRobert L. Bacon first put forward in Secrets of Professional Turf Betting: “Theprinciple of ever-changing trends works to force quick and drastic changes ofresults sequences when the public happens to get wise to a winning idea.”10
Part OneMumbo Jumboand Moonshine
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1
THE MEME
A curious piece of news comes to us from Rio deJaneiro. Madness, an epidemic of madness, which may becompared to that contagious madness which attacked thepeople of Europe in the Middle Ages, is at this moment ragingin the Province of Sao Paulo. The frightened inhabitants areleaving their houses, deserting their villages, abandoning theirland, saying that they are pursued, possessed, governed likehuman cattle by invisible, though tangible, beings, a speciesof vampire, which feed on their life while they are asleep.—Guy de Maupassant, “The Horla”1
J
uly 18, 1996: What a beautiful century! As the beginning of the thirdmillennium nears, America is looking forward to continued peace andgrowing prosperity. Communism has been discredited, and the Cold War isover. World trade is opening up. We’re starting to spend money on goods andideas, rather than multibillion-dollar schemes of mutually assured destruction. The federal budget has a surplus for the first time in decades. Interestrates are at half the level of 15 years ago. Productivity and earnings are rising,23
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and unemployment and inflation are negligible, something thought impossiblejust a few years ago. The computer is transforming work and home life. Revolutions in biotechnology and high-speed communications are under way. Parentscan reasonably expect their newborns to live to age 100 and beyond. Almost 50million people are using the Internet. Many investors are becoming rich frominvesting in technology, and entrepreneurs are finding it easy to raise money fornew ventures. Millions of people are more comfortable financially than theyhave ever been before. The standard of living is better than ever. People are optimistic about improving their lot in life. The future seems promising indeed.I turn on CNBC to hear the financial news. One of my technology stocksis up 15 points! I call my broker to sell half my shares. Now I can pay my kids’tuition bills. Federal Reserve Chairman Alan Greenspan comes on the air. Hesays that remarkable technological breakthroughs in microchips and softwareare boosting productivity. He doesn’t see any reason that the economy’sgrowth should not continue for the foreseeable future. The Dow is up 120. Isalute his image on the TV screen, I hardly know why, except his words giveme great pleasure.The TV anchor then begins an interview with one of the bearish moneymanagers who has been short the market since 1987. The manager launchesinto a familiar speech: “Market valuations are ridiculously high . . . dividendyields aren’t what they were in the 1950s and early 1960s . . . the Dow has already risen almost 9 percent so far this year, enough for an average year, afterrising 33 percent in 1995.” Indeed, with dividends reinvested, it has returned1,200 percent since the end of 1979. But he sounds a little desperate, as wellhe might, given that so many who had bet against the market beginning in1987 have gone belly up. He makes no mention of the decline in interestrates, or the doubling of earnings retention rates, or the fact that buybacks arenow running equivalent to dividend payouts. Nor did he provide evidence thatstocks must go down after going up at more than the average rate. If only hewould take out a pencil and envelope, he could see that after a rise, the chancesof another rise the next year are 53 percent versus 52 percent after a decline andthat the average move after a rise is slightly greater than after a decline.December 6, 1996: I turn on the 6 A.M. business news when I wake up. Catastrophe has struck. Last night, after the U.S. markets closed, Greenspan suggested that investors are “irrationally exuberant.” Markets are diving in Asiaand Europe.A sudden shiver of agony runs through me. The chairman is like the father of the market. If the market were to heed his words, if it were to startworrying that he might punish it by requiring more margin, it might fall beneath his big heels.
Chapter 1 • The Meme
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His words, taken alone, do not seem too foreboding. He was not even addressing Congress. It was just an after-dinner speech at the American Enterprise Institute on the history of monetary policy. I pull up the quote on theInternet:Where do we draw the line on what prices matter? Certainly prices of goods andservices now being produced—our basic measure of inflation—matter. But whatabout future prices or more importantly, prices of claims on future goods and services, like equities, real estate or other earning assets? Is stability of these pricesessential to the stability of the economy?Clearly, sustained low inflation implies less uncertainty about the future, andlower risk premiums imply higher prices of stocks and other earning assets. Wecan see that in the inverse relationship exhibited by price/earnings ratios and therate of inflation on the past. But how do we know when irrational exuberance has unduly escalated asset values, when they become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor thatassessment into monetary policy? [Emphasis added.]. . . Evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.2
“But how do we know . . . ?” It sounds like such an innocent question. Bythe time the market closed, everything seemed pretty much back to normal.The Dow ended 55 points lower at 6382, a drop of less than 1 percent, afterfalling as much as 144. But why did our self-confidence change so quickly intotimidity? How strange it is that a simple feeling of discomfort—perhaps theirritation of a nervous center, a small disturbance in the imperfect and delicate functions of our mental machinery—can turn the most lighthearted ofmen into a melancholy one, and make a coward of the bravest.I walk down to the river near my house to watch the tugboats and bargesgo by. After walking a short distance in the sun, I suddenly, inexplicably, feelanxious and wretched. I return home immediately to check the stock priceson my monitor. Why am I worried? Is it a phrase that, passing through mymemory, has upset my nerves and given me a fit of low spirits? Is it the frownof CNBC’s Money Honey as she passes along word of an analyst’s downgrade,or is it her new short hairstyle? Everything that surrounds us, everything thatwe hear without listening, every idea that we meet without clearly distinguishing it, has a rapid, surprising, and inexplicable effect on us and on ourorgans, and through them on our ideas and on our being.February 