In the grand scheme of the cosmic calendar, human beings haven’t been around all that long. Although we have greatly evolved in the thousands of years we’ve been walking upright, it’s easy to slip back to Neanderthal thinking. Especially when we are frightened by things beyond our control and our neurons start firing in all sorts of directions. Let’s dig through 5 quick common bear market behaviors that turn us back to caveman thinking.
FIGHT OR FLIGHT ??
Or also known as loss aversion. Losing investments feel worse than winning ones feel good. So, when markets start correcting, it’s easier to pack it in than to stay the course. It was normal for cavemen to hoard food for the pending cold season. Animals would be harder to hunt and conditions would be worse. Of course, this was proactive behavior. Investors seem to have flipped this in terms of when they hoard, converting investments to cash once the winter has already come. But, since 1980, in the years when the S&P did experience a double-digit decline, 13 of those 21 times—or 62% of the time—the market ended the year with a positive return.
THE TRIBAL ELDER ????
Before going full flight, it’s common to turn to those who know more than we do about the current investing environment. And what better place to find this wisdom than Twitter. Every basement-dwelling bear market expert has come out of hibernation to offer their opinion. Falling down the rabbit hole of doom is easy to do - they are saying what we are thinking. It’s confirmation bias 101. Permabears are like broken clocks in that they are right twice a day. But that leaves a lot of appreciation time that could also be missed.
WE LOOK TO THE STARS ?
Pattern recognition is an important survival trait. If a caveman recognizes the pattern of attack by a saber tooth tiger, they will have more time to run. The search for patterns in investing is found in technical analysis. Imagine investing was so easy that a map would tell us when to expect bottoms, how much farther corrections have to fall, and if bounces are dead cat or legit. The gamblers' fallacy has us look for patterns where none may exist. It helps explain the random. How about markets don’t go straight up.
FEAR OF BAD DECISIONS ??
When I saw Gary Belsky, author of “Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the Life-Changing Science of Behavioral Economics,” he discussed why we would rather eat the same food every day instead of trying a random fruit that we find growing on a bush in nature. Fear of regret is a caveman behavior, after all the new food could make us sick. Therefore, we cannot take the risk. It’s the same reason we hold on to poor investments. By not selling and locking in a loss, an investor can avoid the feelings of regret. But really, an investor should be thinking about opportunity cost. By owning one thing, we are not owning something else. And which has the better chance to get an investor back to even or profit?
LIFE EXPECTANCY ?
I don’t know the average life expectancy of a caveman, but I promise you it isn’t as long as it is today. Long-term planning has a different meaning when 40 is considered old age vs today when according to the Social Security Administration, almost one out of every four 65-year-olds today will live past age 90. To avoid eating cat food in retirement and living in your kid’s basement, investors need to think about planning beyond the life expectancy of a caveman. That means sticking with your investing plan and not timing the market. Market timing requires you to be right twice, once when you get out and again when you get back in. I always hear investors say they will get back in when things calm down. Like the market is going to wait for you. Calmed down means higher prices.
Remember, our conditioned behaviors made sense when we lived in the caves and hunted for our food. They don’t help when we apply them to investing.
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