Welcome Fellow Lizard Brains!

Back in 2005, Terry Burnham penned Mean Markets and Lizard Brains. The point of his terrific book was that parts of our brain are wired to behave in a reptilian fashion, responding to fear and greed instinctively. Yes, I have that same reptilian response that you do-come on, admit it! When the market is volatile and the talking heads are using words like “crash”, you and I both want to head for the exits! It is…..what we call human nature. None of us are flattered to consider ourselves lizard brains, but…..we all have those moments when we think like lizards.

The problem with this is that these connections in our brain are functional in some situations but dysfunctional in the investment world. If you see a rock falling towards you, your lizard brain tells you to get out of the way. You don’t ponder your action; you just get out of the way. Thank goodness for that lizard brain, it just saved you! In investing, however, that same thoughtless reaction from” Lizard Central” is what gets you into trouble.

One of the greatest examples of someone investing despite their lizard brain telling them not to was Sir John Templeton. He was a legendary “contrarian” for whom the investment firm Franklin Templeton is now named. He followed the advice (often credited to Baron Rothschild) to “buy when there is blood in the streets”. So, when many stocks plummeted at the beginning of the Second World War, he went out and bought some of all of the listed stocks which fell below $1 in price. Four years later, he sold them for a profit of approximately 400%. His lizard brain (just like yours and mine!) was telling him to duck and get out of the way. His economic sense was that this was an opportunity to invest in stocks when there was literally blood in the streets and stocks had fallen to prices that made them cheap and attractive. He evaluated the risks and potential rewards of the investment and found it compelling. In doing so, he was ignoring his lizard brain and using a more highly developed area of the brain to do some critical thinking.

Dalbar just updated their research on comparing how investments do to how investors do. According to Jason Zweig in the Wall Street Journal of May 9, 2014, Dalbar found that the average investor in US Stock funds earned 3.7% per year over the past 30 years. During this period, the S&P stock Index returned 11.1% annually and funds underperformed the index by about one per cent per year. Where did all the money go if not to investors? The answer is all in the lizard brain. Investors get greedy and invest more after markets have risen. They get fearful and pull out of markets after they fall. This is why investors consistently underperform investments. If you can overcome that fear and greed, you can learn to buy a bit more when investments fall (as they get cheaper, you expect to have a higher return on the money you invest) and cut back a bit when markets soar (reducing the amount you expect to make in the future on your investment).

I know, it isn’t easy! We all duck when we see that rock falling!

By Ted Schwartz, CFP©