July 2022 Letter

July 22, 2022

The stock market is a device for transferring money from the impatient to the patient.

-Warren Buffet

How long has it been since you watched The Wizard of Oz [1939] in its entirety? Those flying monkeys are still terrifying!

I have recently been thinking of a clip from the movie. Remember the point when Dorothy, Toto, the Tin Man, and the Scarecrow are skipping down the Yellow Brick Road lyrically reciting, “Lions and Tigers and Bears! Oh my!”

The group is afraid of what lies ahead, afraid they may run into some lions, tigers, or bears. In fact, they do, the harmless Cowardly Lion.

Today, I hear a similar tune, supported by the media, “Markets and Interest Rates and Inflation!”

Oh my!

I know my friends and clients are familiar with the following hurdles to successful long-term investing, but a quick reminder never hurts.

Personal Biases

Most of us are predisposed to focus on negative or scary things. It is literally encoded in our DNA. Paying attention to lions and tigers and bears proved more successful for our ancestors than focusing on a beautiful sunset over a field of flowers.

This deep-seated negative bias that we seem to have can be exacerbated by another bias – confirmation bias. In the 1960s, cognitive psychologist Peter Cathcart conducted several experiments around confirmation bias. Cathcart was able to prove that people tend to seek information that confirms their existing beliefs.1 We all want our beliefs to be the correct beliefs.

The combination of these two biases has the potential to lead us to some very convincing opinions – true or false.

Media and Marketing

Televised, print, and social media are fully aware of this predisposition and use it to sell ads and get clicks. In 1989, New York Magazine reporter, Eric Pooley, was troubled by the sheer number of grim and menacing headlines.2 “The thoughtful report is buried because sensational stories must launch the broadcast: If it bleeds, it leads.”

Financial Anchoring

Maybe not all, but most friends, clients, and family I interact with have more success and wealth than they ever dreamed. In most cases, more today than they could have expected just two or three years ago. Morgan Housel, Psychology of Money author, surmises, “What feels great is being on an upward path. That’s when dopamine takes over. That’s when you can extrapolate it and assume it goes on forever, and compare yourself to where you were before, and feel like nothing can stop you.”

Even though our income, net worth, and standard of living are significantly higher, the first blip in these numbers can cause significant anxiety. That anxiety can cause us to focus on the negative things and then keep seeing those things that confirm our fears.

Emotional Investing

We are emotional creatures; it is an inescapable part of our decision process. This is mostly a good thing, and it is part of what makes us human.

That said, the prior point of biases, media, and anchoring can combine with our very human emotions and lead us to some poor decisions. When our income and net worth are high and trending higher our excitement and confidence grows. It feels like this is going to continue into perpetuity.

Conversely, a dip in our upward trajectory those same can cause our fear and anxiety emotions to take over.

Both of these extremes undermine our long-term success. Put simply, our emotions, unchecked, drive a desire to buy high and sell low, to take more risk in higher risk environments and reduce risk at less riskier times.

Acknowledge these genetic traits and outside forces exist but be aware of their impact on your decision process.

Please let me know if you would like to discuss these topics or anything else on your mind.

-DC

1How Confirmation Bias Works. Sourced from – https://www.verywellmind.com/what-is-a-confirmation-bias-2795024
2If it Bleeds, it Leads! Sourced from – http://evaluatingconversations.weebly.com/if-it-bleeds-it-leads.html