This is your brain in a Bull Market

How far can our stock markets rally?

Friends, there is really no way to deny the euphoria stock investors are feeling in 2013: We have seen things like the twitter IPO going up 70% in one day… the IPO of Potbelly (a sandwich shop with toasted sandwiches – not a new concept) doubling on the first day… Sprouts Farmer’s Market doing a second offering of stock at a price double their IPO (less than 6 months ago that IPO was 18 – they just did a secondary offering at 42… wow!).

And let’s face the facts – with bonds paying next to nothing and commodities suffering (as investors see no evidence of inflation), stocks seem to be the only game in town for the moment.

A few weeks ago, Marketwatch.com did a pretty good story titled, “This is your brain in a bull market” that featured several important points to consider. Here are some of the relevant excerpts:

• As people see prices rising, they want to be with their fellows, seemingly invested in stocks. And a dollop of greed on top of our wish to be part of the consensus doesn’t hurt either. We see others seemingly getting rich, and we want to get rich too. So, really, a combination of our social traits and our competitive traits likely drives prices to unreasonable levels.
• …human beings take cues from each other readily. We are social beings, and we seem to have an inherent aversion to ostracism. Scientists observe significant neural activity in segments of the primitive part of the brain, the insula and the anterior cingulate cortex, which register physical pain in subjects experiencing social ostracism in laboratory tests. In other words, we can experience being alone or having contrary opinions to others as physical pain.
• The weaknesses of the deliberative parts of the brain combined with our tendency to be in agreement with our fellows produce in us collectively as market participants the tendency to overreact to information, and to push prices of securities much higher than they should be at times and much lower than they should be at other times. 

Are these comments avoiding a harsher reality?

From our seat, when prices rise (like they have in recent years), the neurons in the primitive, reactive parts of our brains start firing. These cause us (however perversely) to buy securities that cost more than double the price they did a few years ago. This reminds us of other bubbles we have all experienced in recent years where higher prices are begetting still higher prices – not for economic reasons, but because of our psychological weaknesses. To be clear, we are not saying definitively that the stock market it is a bubble or that a harsh-sell off is imminent.  There probably are some isolated bubbles in the market in specific sub-sectors and with specific companies.

This is your brain in a bull market, and it’s not a lovely picture.

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This post was written by Conscient Capital