Investment psychology – Part 1

by | Dec 1, 2018

“Science does not know its debt to imagination” -Ralph Waldo Emerson

Dopamine – what does this have to do with investing?

Much research on brain functioning is done in the  area of risk and reward.  What is interesting is that there is a physical reaction in the brain chemistry to both gains and losses.

Dopamine the feel- good chemical in the brain is affected in the following way:

If you receive an unexpected reward your dopamine levels increase more than when the expected reward is received. In contrast, when an expected reward falls through dopamine emission stops completely.

During the last ten years since the 2008 Prime Lending Crisis the markets performed well, and investors were used to double digit returns. This then became the expected return.

However, the last three years in South Africa have been particularly challenging and the expected returns have not materialised.

Therefore, it is likely that your Dopamine emissions have stopped and you naturally feel very down.

Simply being aware of dopamine’s effect on your psyche is critically  important.  Do not make irrational decisions when faced with losses.

So this leads to the question of switching when markets are down and our feelings are down…


Is this the time to be switching?

Most managers that we have chosen are contrarian in nature, which is especially difficult in uncertain times and times of under performance.

This makes it even more important to remain focused on our core strengths with the fund we choose to invest in: bottom-up, long-term, and contrarian stock picking. It is this philosophy that has allowed them to deliver superior returns for our clients since inception. We continually reassess risks and potential returns as circumstances change; making appropriate portfolio changes over time.

However, times like these can often cause fear amongst investors which cause them to want to react and do the wrong thing at the wrong time. It is especially important for clients to stick to their long-term investment strategy in difficult times, and not make changes unless their needs have changed. That is why we are here to help you, to align investment products and funds with your investment time horizon and objectives, and remain focused on the long-term goal throughout the market cycles.

It is useful to keep the following Carl Richards from Allan Gray slides in mind:


Should I switch out of high-risk into low risk?

As an example – Over recent time periods, the Allan Gray Stable Fund we hold in the low risk space has delivered returns in line with its dual objectives of capital stability and outperforming bank deposits. On a relative basis, it has outperformed higher-risk asset classes such as bonds and equities. This relative outperformance is unusual given the lower-risk nature of the Fund, and we do not expect it to hold true over long time periods.


Will performance recover, and when?

We do not view risk as volatility, but rather as permanent loss of capital. Although we understand that recent underperformance can be uncomfortable, it is especially important during these uncertain times to remain focused on your long term investment goals and not react to short term sentiment. As bottom-up stock pickers, we don’t pay much attention to benchmarks or to what other investors are doing. Instead, our investment decisions are based on high conviction beliefs that each individual stock in the portfolio is trading for much less than it is worth. The current period of weakness reminds us of similar times in the past when short-term pessimism created opportunities for us to buy great companies at a price below what we believe they are worth.


Allan Gray has a tried and tested investment philosophy that has allowed them to deliver pleasing long-term performance for our clients over the past 40 years.


Will the market recover?

Yes markets are cyclical in nature.


What should we do?

Stay invested and stick to your long-term investment strategy.


In the next parts we will examine Serotonin transmission in the brain and neuroeconomics.