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Your Brain On The Market


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The title of this blog is taken from the “This Is Your Brain On Drugs” (see Brain On Drugs below) public service announcement (PSA) that was run by the Partnership for a Drug-Free America in the 1980s.

The video shows a man talking about the dangers of drugs.  He holds up an egg and says, “This is your brain.” Next he turns to a hot frying pan on a stove and says, “This is drugs.” He then cracks open the egg, fries it, and says, “This is your brain on drugs.” Finally he looks up at the camera and asks, “Any questions?”

Brain On Drugs Video (click to view the PSA)

Why is a wealth management firm talking about brains getting fried like eggs? It’s to remind everyone that powerful stimulants can impact our investment behavior. Drugs are stimulants, for sure, but so is money, especially when money is the focus of emotional media and unsettling headlines (see examples below).

Last week, published a story discussing just how powerful a stimulant money can be. The daily brief gives an overview of a book out by Kabir Sehgal, Coined.

The following is taken directly from the transcript of Mr. Sehgal’s YouTube video for The Big Thing that highlights his book:

“I looked at the topic of what’s happening in the brain when we deal with money. And there’s a part of the brain that activates — it’s called the nucleus accumbens. It’s deep within the sort of evolutionary, the oldest part of the brain. I looked at studies that compared people who make money to those who are high on cocaine. Remarkably, the brain scans were almost identical.”

Yes, your brain gets fried on drugs and it also gets fried on money.

Stoking an emotionally charged headline or two, Sehgals goes on to say:

“I also looked at brain scans of the people who are high looking at naked women, dead bodies and money. And what got the most activation? Money.”

See What Excites You The Most to view the complete video

Many studies have shown that investors are more stimulated and feel more pain when they experience losses than when they experience gains. Even without the research, however, I think we  know instinctively that we can get anchored on our failures instead of our successes or all the things we have to be thankful for.

Coming back around to the stock market, we have certainly experienced a few emotionally-charged down days year-to-date.

Just as it is almost impossible to resist slowing down and taking a look at a car wreck, it is very difficult to resist sensational headlines like:

“Total Fail!”

“U.S. Stocks Post Worst 10 Day Start In History”

Why don’t we see more headlines illustrating how markets tend to have solid rebounds off 10 day downturns, which reward long-term, patient investors?

My favorite so far from today is the following, which is both emotionally charged and inaccurate:

“Stock Exchanges Plunge Into Bear Market Territory”

I will not mention the well-respected daily financial paper that published the headline above, but will remind you all that a bear market is a 20% drop, not a 10% drop.

Being down 10% certainly gets our neurons firing. I encourage everyone to remember, however, that 10% drops are not uncommon. Think about the old saying, “Investors create 50 year floods every 5 years” (yes, it’s OK to smile when you think about the words “investors create”).

We are getting calls from clients and fellow professionals asking our opinion about where the market will go next. I don’t have a crystal ball, but I am willing to make the following predictions. If you continue to see the market drop, you will see:

  • More sensational headlines that are designed to sell ads, but not conducive to good investing
  • Wall Street, which loves volatility, not missing out on the opportunity to sell a trade or a product when anxiety is high
  • Sales pitches for expensive downside protection products and hedging strategies

If and when these predictions come to pass, to paraphrase another drug-related PSA, “Just Say No”

Finally, below is a chart that I hope will help us all feel better about the emotions we’re feeling (professional investors included).

Just yesterday, two clients, who consistently push us to buy on big down days, called to make sure we were not buying this time. Instead, they wanted us to place what they acknowledged would be inefficient and expensive downside protection trades. I told them that we didn’t recommend this and, when they pushed back, reminded them of the following quote:

“It is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism…  For it is in the essence of his behavior that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy.” – John Maynard Keynes

We aren’t sure what the next few weeks or months will bring, but “alarmed” and “frightened” comments (see the above graph) from seasoned investors can mean it’s a time to stay away from the market frying pan and make sure you don’t get fried by selling at the wrong time.

To read more about advice we are giving to our clients, please read the following republished posts.  They include research on how investors tend to underperform the market over the long term by making short term buy or sell decisions at the wrong time, along with a few rules for investing that we hope you will find helpful.

Keep A Steady Hand On The Tiller (wrote this last Summer during another market bump that was China related)

No Crystal Balls (includes charts and links to research showing how Wall Street and Federal Reserve prognostications are never in doubt but often wrong)

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