My Esquire piece on big tech getting bigly (I know, I know…) is live online and hits newsstands next week.
What. A. Thrill.
Gut vs. Emotion
Instinct is powerful, and useful. We’re blessed with millions of years of experience that register a strong sense you shouldn’t pet a snake or eat things that smell foul. The heart is often linked to emotion. But it ends up the gut and the vagus nerve are the original gangsters, with a direct line to your brain, influencing how you feel and behave. Similar to the brain, a plethora of neurons form neurotransmitters in your gut. Supposedly the gray matter of a cat’s brain is nestled in your girth. The good-time hormones, serotonin and dopamine, spend more time hanging in your gut than your brain. So, the key to someone’s heart is in their gut.
It’s an upward journey via the brain-gut axis that originates from bacteria in your GI tract, moves past the heart via the vagus nerve, picks up momentum fueled by budding emotion, and then hits the TSA that is the brain — slow down, put all your emotions in a gray bin. You can leave your shoes on, and laptop in your bag, if you aren’t prone to wild mood swings (Pre-Check).
We need our emotions to run through a metal detector. Emotions are an important and rewarding part of life, but they’re often poor inputs to decision-making. It’s wonderful to feel love, but its ability to blur judgment, which informs good decisions, is the grist of war, child support, and other uber-bad outcomes.
The Dow Jones puked a thousand points Thursday, after doing the same last week. Boom, the neurons in your gut start churning and sending signals that get emotion and momentum. I bought a retail stock three months ago, thinking it had been so badly beaten up, it was due for a pop. People would realize that, while the firm is in fact going out of business, it’s going to die more slowly than the market thinks. By the way, this is a decent descriptor of every old-media firm right now. This company’s stock, after Thursday’s close, is off 25%, and… that hurts my feelings. That is, if hurt were a mix of anger, embarrassment, and self-loathing. But I digress.
Not wanting more tears in the rain, my emotions tell me to sell, to limit my downside of hurt. But the TSA steps in and asks, if I hadn’t bought higher, and the stock was here now, sans the pain, how would I feel then? The answer is, I’d want to buy a bunch, instead of sell. Barry Ritholtz pointed out this phenomenon to me as the reason most retail investors have portfolios that underperform the market, and do worse than even the stocks in their portfolio. People let emotion get in the way. They sell when things have declined, and are good values, and fall in love with stocks that have skyrocketed, and may be overvalued. If you had opted to get off the roller coaster of the markets in March of ’08 (understandable), you’d have sold at a low, missed the short 14 months it took to recover all of it, and be much, much worse off.
The markets are Bishop from Aliens. They move and reflect traits of the sentient, but have no heart. The market doesn’t feel sorry for you when you’re about to lose your home, nor is it jealous of you when you buy a jet — it doesn’t care at all. If the markets registered emotion, would Jeff Bezos have accrued a personal net worth higher than the GDP of Ukraine?
Sidebar: I wonder if AI is a step to artificial emotion, and what that might mean for us. The adaptation central to AI sounds to me like the process of when your brain and emotion begin to improve or worsen decisions. #deepthoughts
To be one with the markets, and be a great investor, you have to be somewhat synthetic. Your role model is the cold, mission-focused android officer of the Sulaco — Bishop, not Ripley.
For the last decade, the markets have rewarded, more than any human or synthetic, the only other true android investor… the market itself. The greatest reallocation of capital in history has been flows of capital out of active investors, like hedge funds, even bypassing the near-synthetic of quant funds, and going to full Bishop with ETFs, void of all humanity. ETFs are structured to balance and rebalance to mimic the market, or sector, with no gut or emotion getting in the way. Active managers as a profession could best be described, over the last decade, as awful… but expensive. Pension funds, sovereigns, and family offices have paid rich fees for the pleasure of underperforming the S&P by the amount of their fees, and then some.
Who is the Warren Buffett of our age? Bishop.