I like things like this. Jason Zwig had this article some time ago, Wade Sloan uses it and makes a point and then Davidson comments on both… We are in such a time of irrationality now….a time when the Fed is going to raise rates because of the strength of the US economy, markets are selling off because of rising rates. A simple look back at past rate cycles from the Fed shows us once the Fed starts raising rates, markets continue higher for years.
“Davidson” submits:
Articles such as this one, tend to sharpen my focus and bring multiple observations together in the same point.
One needs a measure one can trust to offset fear of the unknown. Fear is an emotional response to threats to one’s existence. The military trains individuals to lower the emotional response in order to think logically. Investors do not have such training. What we have are a few individuals whose natural responses market situations are more logical than emotional. These ‘cold hearted’ individuals are Value Investors. They naturally have a low emotional response to threats in general.
I think investors can be taught to think logically but they require logical argument to counter the presence of market psychology to which human beings are like many species tightly attuned. Watching a herd of animals turn on a dime and race off in the opposite direction when one of them senses a threat is what we do when we listen to one or more ‘gurus’ (as we call them) issue advice in the media.
My SP500 Intrinsic Value Index ($SPY) is a relationship which captures the thinking of Value Investors. It is the distillation of my investment studies and the product of my own more logical than emotional responsiveness personality. If I were any more emotional, I would likely over-weigh market psychology as most do and if I were any more logical, I would understand Value Investing but miss the role Momentum Investors play in driving markets and individual issues to such silly levels with spurious justifications.
It is the relationship in SP500 Intrinsic Value Index which provides a useful benchmark. It is the “Holy Grail” for investors in my opinion. It lets one keep one’s head when all about have lost their sense of valuations. I think this relationship can be taught and serve as a focal point from which students of investing can come to learn the entire investment arena. The US is unique at the moment in having the data available to do this. The data is not there for other countries which have not been as focused as we have been nor as far along on measuring businesses and economics. But, having the US as a base one can infer when other equity indices are at major peaks and lows.
I spoke about the human genetic basis for our cooperation, sharing and our strong passion for learning about the unknown as the basis for human survival and advancement. When humans are focused strongly on giving to others something they have discovered which advances the well being of all, they find deep satisfaction. They discover they have found their purpose in life and cooperate selflessly with those near them. This is the basis for ‘lean processes’ that we see developing in our business culture. Two books discuss this sense of engagement: “Flow: The Psychology of Optimal Experience” by Mihaly Csikszentmihalyi and “Drive: The Surprising Truth About What Motivates Us” by Daniel H. Pink. It is why I enjoy working with you. You appreciate the time I provide, but being able to share what I have learned is likely more important to me.
The genetic basis for behavior has its roots in studying identical twins who were separated and raised apart from birth. Nothing has been scientifically proved, just observed. If we are able to identify specific genetic code linked to behavior, then many mysteries about human behavior will be unraveled. Society will have choices to make with having this information available about how to treat the sociopaths among us. Our perception of human rights and the value of life has only become more evident as humans have advanced socially. I have no doubt that we will make the right ethical choices when this information becomes available. You can get this by reading “The Better Angels of Our Nature: Why Violence Has Declined” by Steven Pinker.
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[Archives] Jason Zweig: Alligators, Airplane Crashes, And The Investment Brain
Posted By: Investing CaffeinePosted date: September 26, 2015 06:33:27 AM
By Wade W. Slome, CFA, CFP®, Investing Caffeine
Posted February 2011
“Neither a man nor a crowd nor a nation can be trusted to act humanely or think sanely under the influence of a great fear…To conquer fear is the beginning of wisdom.” – Bertrand Russell
Fear is a powerful force, and if not harnessed appropriately can prove ruinous and destructive to the performance of your investment portfolios. The preceding three years have shown the poisonous impacts fear can play on the average investor results, and Jason Zweig, financial columnist at The Wall Street Journal presciently wrote about this subject aptly titled “Fear,” just before the 2008 collapse.
Fear affects us all to differing degrees, and as Zweig points out, often this fear is misguided – even for professional investors. Zweig uses the advancements in neuroscience and behavioral finance to help explain how irrational decisions can often be made. To illustrate the folly in human’s thought process, Zweig offers up a multiple examples. Here is part of a questionnaire he highlights in his article:
“Which animal is responsible for the greatest number of human deaths in the U.S.?
A.) Alligator; B.) Bear; C.) Deer; D.) Shark; and E.) Snake
The ANSWER: C) Deer.
The seemingly most docile creature of the bunch turns out to cause the most deaths. Deer don’t attack with their teeth, but as it turns out, deer prance in front of speeding cars relatively frequently, thereby causing deadly collisions. In fact, deer collisions trigger seven times more deaths than alligators, bears, sharks, and snakes combined, according to Zweig.
Another factoid Zweig uses to explain cloudy human thought processes is the fear-filled topic of plane crashes versus car crashes. People feel very confident driving in a car, yet Zweig points out, you are 65 times more likely to get killed in your own car versus a plane, if you adjust for distance traveled. Hall of Fame NFL football coach John Madden hasn’t flown on an airplane since 1979 due to his fear of flying – investors make equally, if not more, irrational judgments in the investment world.
Professor Dr. Paul Slovic believes controllability and “knowability” contribute to the level of fear or perception of risk. Handguns are believed to be riskier than smoking, in large part because people do not have control over someone going on a gun rampage (i.e., Jared Loughner Tuscon, Arizona murders), while smokers have the power to just stop. The reality is smoking is much riskier than guns. On the “knowability” front, Zweig uses the tornadoes versus asthma comparison. Even though asthma kills more people, since it is silent and slow progressing, people generally believe tornadoes are riskier.
The Tangible Cause
Deep within the brain are two tiny, almond-shaped tissue formations called the amygdala. These parts of the brain, which have been in existence since the period of early-man, serve as an alarm system, which effectively functions as a fear reflex. For instance, the amygdala may elicit an instinctual body response if you encounter a bear, snake, or knife thrown at you.
Money fears set off the amygdala too. Zweig explains the linkage between fiscal and physical fears by stating, “Losing money can ignite the same fundamental fears you would feel if you encountered a charging tiger, got caught in a burning forest, or stood on the crumbling edge of a cliff.” Money plays such a large role in our society and can influence people’s psyches dramatically. Neuroscientist Antonio Damasio observed, “Money represents the means of maintaining life and sustaining us as organisms in our world.”
The Solutions
So as we deal with events such as the Lehman bankruptcy, flash crashes, Greek civil unrest, and Middle East political instability, how should investors cope with these intimidating fears? Zweig has a few recommended techniques to deal with this paramount problem:
1) Create a Distraction: When feeling stressed or overwhelmed by risk, Zweig urges investors to create a distraction or moment of brevity. He adds, “To break your anxiety, go for a walk, hit the gym, call a friend, play with your kids.”
2) Use Your Words: Objectively talking your way through a fearful investment situation can help prevent knee-jerk reactions and suboptimal outcomes. Zweig advises to the investor to answer a list of unbiased questions that forces the individual to focus on the facts – not the emotions.
3) Track Your Feelings: Many investors tend to become overenthusiastic near market tops and show despair near market bottoms. Long-term successful investors realize good investments usually make you sweat. Fidelity fund manager Brian Posner rightly stated, “If it makes me feel like I want to throw up, I can be pretty sure it’s a great investment.” Accomplished value fund manager Chris Davis echoed similar sentiments when he said, “We like the prices that pessimism produces.”
4) Get Away from the Herd: The best investment returns are not achieved by following the crowd. Get a broad range of opinions and continually test your investment thesis to make sure peer pressure is not driving key investment decisions.
Investors can become their worst enemies. Often these fears are created in our minds, whether self-inflicted or indirectly through the media or other source. Do yourself a favor and remove as much emotion from the investment decision-making process, so you do not become hostage to the fear du jour. Worrying too much about alligators and plane crashes will do more harm than good, when making critical decisions.
Read Other Jason Zweig Article from IC
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.