The Only Thing We Have To Fear, Is Fear Itself

Weather you know that phrase from the 5th sentence in Franklin Delano Roosevelts first inauguration speech on March 4th 1933, coming out of the great depression, or believe it was borrowed from David Thoreau’s journal on September 7th 1851 where he wrote “Nothing is so much to be feared as fear”, the underlying truth of the statement stands as true today as it did over 170 years ago. Maybe, more so. I’m oft reminded of one of the great newspaper barons of the past who remarked that “bad news, is good press”. Here is our contemporary problem. We don’t need to read pages and pages of newspapers to consume that bad news. We have it blasted at us on a 24hr news cycle, and since bad news sells, you can bet that you are going to get a large heaping of it. Unfortunately, that’s not the sum total of the issue.

Dr Daniel Kahneman got the Nobel prize in economics in 2002. The interesting thing about that is he is a psychologist! He pointed out that most people cannot be dispassionate about their money. The reason he sighted, was that money is tied up in your hopes, your dreams, your lifestyle and for many, especially in America, your self-esteem. So it’s no wonder that when we have a market correction our brains go into a fight or flight mode.

Being paranoid and thinking it’s the end of the world on a daily basis might be the proper way to look at life in 10,000 B.C.

Thoughts of “oh my god, I’m going to lose it all, how will I live, how will I pay for things, why didn’t I see this coming” fill the average persons mind. In fact, Dr Kahneman pointed out that “the brains of humans contain a mechanism that is designed to give priority to bad news”. Now I don’t think we need to delve to deeply into why that is to understand it. Purely on an evolutionary basis, it makes sense if you believe that being paranoid of bad things happening was probably good for the cave man’s survival when we were on the savanna inhabited by lions. We may celebrate Usain Bolt, but realistically, compared to a lion, we’re just not that fast or all that strong. So yeah, being paranoid and thinking that it’s the end of the world on a daily basis might be the proper way to look at life in 10,000 B.C. But let’s fast forward that evolutionary cycle where along with the crocadile brain that reacts only on impulse and fear, we developed the prefrontal cortex of the brain. This is the area that is newest in man and responsible for complex decision making. It’s why we can focus our attention, predict consequences of our actions, anticipate events in the future, control our impulses and emotional reactions, and plan for the future. It’s also where creativity comes from. Although it’s true that our ability to imagine alternate futures is why we will delay gratification today to have a more secure tomorrow, we are also able to imagine a dystopia that would make film makers jealous. Our greatest trouble comes when we let the crocadile brain, whose job is to be paranoid, harness the vivid imagination of the neocortex.

Our greatest trouble comes when we let the crocadile brain, whose job is to be paranoid, harness the vivid imagination of the neocortex”

Ever have a vivid dream that makes Jason from Halloween look like a boy scout? Yeah, that’s the croc brain shaking hands with the neo cortex and having a play date! However, when we wake up we recognize it for what it is, an unrealistic vision of what could happen in trillions of scenarios and we move on. But also note this; when we are in the dream we don’t think it’s unrealistic!

 

And so it is with the markets. Combining the 24hr news cycle that influences and monetizes using the tools of sensational news, engineered to excite the crocadile brain and combine that with our active imagination that we willingly supply, we weave a scenario that would put superman in the fetal position sucking his thumb! Heap onto that the new era of media called social media and you have yourself a a five alarm blaze. As everyone posts pictures to the world of a meticulously curated slice of their life in an effort to broadcast a “my life’s cooler than yours” message, we go from anxious to doubly anxious. “I’m watching my money disappear and this person is drinking champagne toasting a group of friends on the beach in some exotic paradise location” “This is even worse than I thought” we tell ourselves.

However, here is what we know by use of that magical prefrontal cortex; that market correction are, well, kind of hum drum. In fact a 10% market correction happens about every 12-18 months, and a 20% correction shows up about every 5 years. What about the big ones? You know, those 35%+ corrections? Yeah, those show up too, usually at the end of an economic cycle or after massive excess returns, somewhere in the neighborhood of 10-12 years, normally. Do you know what follows that? Bull markets. But the crocadile brain doesn’t care about that since bull markets are not a threat. You know who else doesn’t care about that? The media. I suspect that’s because good news is not good for business, just ask William Randolph Hearst. Or Winston Churchill who famously said “Never let a good crisis go to waste”.

So let’s follow the lead of the most successful people like Warren Buffet who explained that he buys good companies and holds them through thick and thin with the realization that there is far more good days than bad days. Some might say that he’s a pretty successful chap.

...we also have that shiny new prefrontal cortex that allows us to tell the croc brain to pipe down as we realize that the next end of the world is in fact not upon us

Let’s understand that we have a crocadile brain and that it’s there to protect us when we in fact need protecting, but we also have that shiny new prefrontal cortex that allows us to tell the croc brain to pipe down as we realize that the next end of the world is in fact not upon us and that this is nothing more than an economic cycle and a relatively regular event. Let’s also harness our greatest human capacity to envision the future in a positive way, after all it’s a pretty beautiful place out that window. Or as the less famous philosopher Ferris Bueller once pointed out “life moves pretty fast. If you don’t stop and look around once in a while, you could miss it”. I think he may have said that to George Orwell who responded “to see what is in front of one’s nose needs a constant struggle”. Or maybe that was just my active neo cortex that put those two together. Either way, my croc brain was quiet as I realize that we are standing on the precipice of the next bull market.

 

Come look, it’s exciting. it’s beautiful!

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