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Welcome to Firstlinks Edition 489

  •   22 December 2022
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I was talking with a work colleague this week and we were consoling each other about the performance of our personal investment portfolios this year. He mentioned that he regretted not partially selling stocks he held at the start of the year. He knew the stocks were overvalued but he liked them and put off selling anything. The market went down and by then it was too late.

My colleague’s dilemma is common. It’s often the investment decisions that we don’t make which we come to regret the most. Why do we hold off making decisions, sometimes forever?

Let’s first explore the science behind botulinum toxin, otherwise known as Botox, for some clues.

Botox and emotions

Originally developed to help people suffering from facial muscles spasms, Botox has become one of the world’s most popular cosmetic treatments. It works by paralyzing the nerves that cause the muscles in the face to contract.

In the early 1990s, researchers found that injecting the chemical into the frown lines between the eyes caused partial paralysis of the forehead - it reduced wrinkling.

A scientist at Barnard College in New York, Joshua Ian Davis, wondered whether Botox could change a person’s behaviour. If you immobilize part of the face, could that reduce the emotional experiences that you have?

The theory harkens back to the 19th century American philosopher and scientist, William James, who believed that thought and emotion didn’t precede action, but followed it. James surmised that you didn’t think and then act, but you acted and then formed a thought about that action. The same went for emotion.

Davis tested the theory on two groups of women. One group had just undergone Botox treatment, while the other group went for an alternative treatment that involved injecting a filler into the forehead. Both treatments sought to give a more youthful appearance, but only the Botox paralysed the facial muscles.

Davis asked the women to watch several video snippets: a serious documentary on Jackson Pollack, a humorous clip from America’s funniest videos, and a stomach-churning video of a man eating live worms. After seeing the videos, Davis asked the women to rate how they felt. The women who’d undergone Botox reported less of an emotional reaction to the clips compared with the group who’d had filler treatment.

The conclusion? Immobility causes a loss in emotional experience.

The Zeigarnik effect

If actions can precede emotions, what about thoughts? In the 1920s, a young Russian psychology graduate, Bluma Zeigarnik, sought an answer.

One day, she was having tea with her university supervisor in a café in Vienna. The pair was watching how the waiters and customers behaved and noticed an interesting pattern. When a customer asked for the bill, the waiter could easily recall the food that the customer had ordered. But when a customer paid the bill, and then disputed the bill, the waiter struggled to remember anything about the order. It appeared that once a customer paid for the meal, it finalized the matter in the minds of the waiter and the details of the order were erased from their memory.

Zeigarnik went back to the laboratory to test the idea. She asked people to do a set of simple tasks, such as putting toys into a box and stacking wooden boxes. On occasion though, she stopped the participants before they had finished the task. As she’d observed with the waiters, Zeigarnik found that the unfinished tasks stuck in people’s minds and were easier for them to remember.

Zeigarnik concluded that starting an activity causes a type of mental anxiety. Once you finish a task, your mind has a sense of relief and the task is quickly forgotten. But if you don’t complete an activity, for whatever reason, then your mind nags at you until you finish what you’ve started.

Fixing procrastination

What has Zeigarnik’s experiments got to do with procrastination? Procrastination often happens because you become overwhelmed by the size of a task. Zeigarnik’s research suggests that if you just start an activity, your mind will be anxious to complete that activity.

Going back to my work colleague’s regrets about his investment portfolio, he would’ve been better off starting the sale of his stocks, even in small increments. That way, he’d have been more likely to complete the sales, rather than putting them off.

This technique to overcome procrastination can apply to other investment decisions:

  • Do you want to take advantage of the higher deposit rates now offered by smaller banks compared with larger banks? Then start an application for a deposit account with one of these smaller banks.
  • Do you want to take advantage of the market downturn to buy a blue-chip company? Start by buying a small portion of what you intend to buy.
  • Do you want to buy a market ETF but you’re afraid that a market downturn may be around the corner? Then, buy a small position in the ETF, or buy equal portions each month over a 6 or 12-month period. The latter is known as dollar-cost averaging and it’s a smart way to overcome procrastination and the fears and anxieties which often come with it.

In this week's edition ...

After a 2022 to forget, what will 2023 bring? Bill Evans thinks inflation will prove sticky in Australia and interest rates will rise in the first half of the year before plateauing in the second half. He sees rate cuts beginning in 2024 as the economy stalls and unemployment rises.

Robert Almeida predicts inflation will fall sooner than what Bill does, and that's good news for fixed income. It won't be as good for stocks though as it'll bring a long overdue profit margin reset.

Australian Ethical's John Woods agrees with Robert's views on inflation as all the key indicators he looks at suggest it's going to fall. He's also a bull on defensive assets such as bonds and infrastructure. These assets should help the portfolios of conservative investors such as retirees. 

And in this week's white paper, Fidelity International offers its 2023 outlook for everything from the macroeconomic backdrop to all the key asset classes. 

Meanwhile, Meg Heffron is back, and she has a bone to pick. She says that while the Labor government left SMSFs alone in the October budget, it might be a different story come next May's budget. Meg suspects there might be something designed to break up large SMSFs.

Shared equity mortgages have been talked about for years, but it's been left to governments to develop initiatives in this area. John Kavanagh reports that things changed this year.

Alex Pollak of Loftus Peak says streaming is disrupting the way TV is consumed and it's likely that all TV will be streamed within ten years. Alex believes Netflix, irrespective of the naysayers, remains the only game in town when it comes to profitably running a streaming service

Finally, in the spirit of reflection at this time of year, we reprise Graham Hand's 2021 article on collectibles. Recently, the collector featured in the story, John Quick, had this to say: 

"Dear reader, I still cannot believe the generosity of Graham and often go back and follow the stories of other collectors. I have been very fortunate that I have had quite a few collections gifted to me since this article was printed. Collecting offers so many positives including meeting like mind people who share the passion.

Not everything is about money. I still get a buzz from finding that elusive card or two which has been sent to me by people who are down sizing or have simply lost the interest and passion of collecting.

Of course, there are many who are no longer with us but there are still people out there who go to the trouble to seek out collectors and move collections on. Better to move things on than to see them go into land fill.

Happy collecting to all you collectors out there Cheers......John"

Merry Christmas everyone and thank you for supporting Firstlinks.

James Gruber

 

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