Perception and reality are not the same thing. And believing they are is a very dangerous for investors. Why? Because you can very easily fall into the trap of “market blindness” – you can assume you see everything while missing the elephant in the room.

Before you ask, we haven’t been smoking something strange here at the Notes office. We’ve been reading Justice Litle’s fascinating essay on trader psychology in today’s Taipan Daily. And we figure contains an important lesson for underground investors.

Justice says a famous experiment by a group of Harvard psychologists reveals big “holes” in human perception, especially when we are concentrating hard on a task. The psychologists asked a group of test subjects to pass a basketball back and forth between players dressed in black and those dressed in white. All they were asked to do was count the number of passes between the two teams.

The psychologists running he experiment then sent out a woman with an umbrella onto the court for about five seconds. Next, the sent out someone dressed in a gorilla suit. The ‘gorilla’ also stayed visible for about five seconds.

Guess what? Thirty-five percent of the test subjects missed the woman with the umbrella. And 56% missed the ‘gorilla.’ As Justice says, “The act of sheer concentration required to tally the movements of the ball, and to keep track of the black and white uniforms, was enough to completely block out the perception of a man in ape suit, standing there, plain as day, for a full five seconds.”

This helps explain why a lot of otherwise smart investors missed market-based ‘gorillas’ such as the tech bubble and housing bubble.

Justice calls it market “tunnel vision.” And if you think about, you’ve probably suffered a bout of this strange disease at some point in your investing career. Equally important, these ‘gorillas’ can help you make money…

The crowd is epically bad at anything having to do with deep analysis or insight. This is because the majority of participants in the market crowd are “flying on automatic pilot to the land of groupthink,” to use an old Doug Casey phrase, and another big chunk are passive and not really possessed with the drive to figure out what’s going on. That leaves only a small handful of market participants to do the real thinking and observing.

And thus, when a gorilla walks into the room, most of the time the crowd won’t notice it. They’ll just keep pushing on in the general direction they were already going, or otherwise ignore the big opportunity – or the big risk – that the gorilla represents. This concept is very powerful because the crowd is not always wrong… but by definition, the crowd is wrong at major market turning points.