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Beware of your Lizard Brain

Updated: Aug 8, 2022

The Wall Street Journal recently had a headline (June 21) that read:

"Stock Market Jumps After S&P 500's Worst Week in Two Years"

This leads me to share one of my favorite authors, Dr. Terry Burnham, author of “Mean Markets and Lizard Brains”. Dr. Burnham combines research as a former economics professor at Harvard, real world experience from his time at Goldman Sachs, and unbelievable educational credentials – a BS in biophysics from the University of Michigan; an MS in computer science from San Diego State University; a master’s in finance from MIT; a PhD in business economics from Harvard and, (where did he find the time?) served with distinction as a tank driver in the U.S. Marine Corps. In his book, Mean Markets and Lizard Brains, Dr. Burnham explains the biology behind why the average investor is by nature, well, in all probability a bad decision maker as an investor because of that part of our primitive brain Dr. Burnham describes as the lizard brain. I won’t go into more details, but the book is a fantastic read, and comports with what you have been hearing for years (and find almost impossible to adhere to) from such sage individuals as Warren Buffet…”be fearful when others are greedy, and to be greedy only when others are fearful”. It is the second part of Buffet’s advice that is so difficult to execute on. Our backward-looking primitive lizard brain extrapolates that our future will be our most recent past. So, during periods of down markets, our brains think this will be our forever future. So, investors get scared and bail out of the market when the volatility gets high and consequently miss many of the market’s best days. Even as these “best” days are often followed by subsequent down days, they also buffer the total drawdown, and one of of them, will be the first of many up days as the market (if it does as it has over the past 100+ years*) resumes an upward trend and ultimately to a new high*. What are the benefits to staying the course? In a February 2022 analysis by Putnam Investments, an investor who stayed fully invested starting with $10,000 from 12/31/2006 through 12/31/2021, accumulated to a $45,682 ending balance. Missing the 10 best days during this period resulted in an ending balance of $20,929…less than half as much terminal value. This includes the period of The Great Recession, October 2007 through March 2009, which the Federal Reserve Bank of Atlanta describes as a period where stock prices fell roughly 50 percent from peak to trough. Understanding how your lizard brain can make you act irrationally is a key component to having the fortitude to stay the course of your long-term investment horizon. Sincerely yours, Dave & Drew

*Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible. A security’s or a firm’s past investment performance is not a guarantee or predictor of future investment performance.

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