{"id":32830,"date":"2012-10-08T09:37:53","date_gmt":"2012-10-08T13:37:53","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/10\/brain-damage-might-improve-your-investment-results\/"},"modified":"2012-10-08T09:37:53","modified_gmt":"2012-10-08T13:37:53","slug":"brain-damage-might-improve-your-investment-results","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/10\/08\/brain-damage-might-improve-your-investment-results\/","title":{"rendered":"Brain Damage Might Improve Your Investment Results"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a>\"\"
\nBrain damage can create superior investment results, at least according to James O\u2019Shaughnessy in his classic What Works on Wall Street<\/a><\/em>.<\/p>\n

O\u2019Shaughnessy refers to a study by Baba Shiv of Stanford University that found that people that had suffered damage to the amygdala or the insula regions of their brains made better investment decisions and had higher returns than those with normal, healthy brains (see the 2005 Wall Street Journal<\/em> article<\/a> on the same study).<\/p>\n

As it would turn out, those two brain regions happen to control how we perceive risk.\u00a0 Shiv found that his healthy test subjects allowed their prior losses to cloud their judgment, causing them to be excessively risk averse.\u00a0 Meanwhile, the brain-damaged investors had no such inhibitions and approached each new investment opportunity without being rattled by prior losses.<\/p>\n

So, what conclusions are we to reach from this?\u00a0 Were successful contrarian investors like Warren Buffett dropped on their heads as babies?\u00a0 Should we lobotomize all money managers to improve their performance?<\/p>\n

Ah, if it were only that simple.\u00a0 As O\u2019Shaughnessy writes, \u201cour brains are wired the way they are for very good reasons\u2026 Indeed brain damaged patients like those in Shiv\u2019s study often went bankrupt because a lack of emotional judgment made them too<\/em> risk-seeking and susceptible to scams.\u201d<\/p>\n

Science has not yet created a \u201cswitch\u201d to flip that will turn us into perfectly rational investors.\u00a0 Alas, the burden of emotional control lies with us.\u00a0 When you feel your heart racing, either in euphoric anticipation of profit or paralyzing fear of loss, you have to step back and consider the numbers dispassionately.<\/p>\n

With all of this said, what are investors to make of today\u2019s market?<\/p>\n

Yes, the market has had a nice run of late, and the S&P 500 is close to hitting its old high. Yet equity mutual funds bled over $19 billion in redemptions in August, the last month for which data is available.\u00a0 This was the sixth month in a row in which investors pulled their money out, and the 14th<\/sup> month out of the last 16 (see \u201cMutual Fund Outflow Soared in August<\/a>\u201d).<\/p>\n

Meanwhile, bond funds have seen net inflows for the past 12 consecutive months.\u00a0 Yes, the same bond funds that are buying 10-year Treasuries at 1.6% yields\u2014well below the rate of inflation.<\/p>\n

After the 2008 meltdown, the 2010 Flash Crash, and the past two years of \u201con again \/ off again\u201d sovereign debt crisis in Europe, investors have dug themselves into a bunker.\u00a0 Having been burned, they are reluctant to touch that hot stove we know as the stock market again.<\/p>\n

For those of us willing to look at the numbers\u2014or perhaps those of us suffering from brain damage\u2014there is ample upside left in this market.\u00a0 At 14 times earnings, stocks (as measured by the S&P 500) can hardly be considered expensive.\u00a0 And when compared to bonds yielding significantly less than the rate of inflation, stocks would appear outright cheap.\u00a0 With prices reasonable and individual investors having already largely fled equities, it\u2019s hard to see the conditions for a sustained bear market.<\/p>\n

But even if macro concerns of excessive investor pessimism keep a lid on stock prices in the months ahead, dividend paying stocks offer respectable cash payouts that are close to as safe as bond yields.\u00a0 According to Standard & Poor\u2019s<\/a>, the stocks of the S&P 500 currently pay out only 30% of their earnings as dividends.\u00a0 It is difficult to see widespread dividend cuts coming from such low levels.<\/p>\n

This is the focus of Sizemore Capital\u2019s Dividend Growth Portfolio<\/a>.\u00a0 At current prices, I believe a portfolio of dividend-paying stocks, REITs, and MLPs with high and rising cash payouts is the most sensible option for most investors.\u00a0 But then, there might be something wrong with my amygdala.<\/p>\n

This article originally appeared on MarketWatch<\/a>.<\/em><\/p>\n

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