Think back to our ancestors for a moment...
In prehistoric times, if a man saw a big group running away from something, he could either run away as well... or hang around and see what all the fuss was about.
We can trace our lineage back to the ones who ran. They're the ones who survived.
That's why, over time, we've been conditioned to act as the larger group does.
A part of our brain called the amygdala drives our body's natural fear response. The amygdala consists of two tiny structures deep in the brain that connect emotions and fear. Your amygdala gets feedback from your senses, and if it encounters anything out of the ordinary, it triggers a threat response.
When you don't follow the crowd, your amygdala starts firing. You might feel nervous... even sick to your stomach. Such a reaction was useful in prehistoric days when mankind's biggest concern was being eaten by wild beasts.
But our instincts work against us in the markets.
Following the herd can cause investors to buy at the top, when everyone else is buying... or sell at the bottom, when everyone else is dumping their stocks.
Let's look at what the herd is doing today...
Right now, we're closer to the end of this bear market than the beginning.
That means we want to start looking for buying opportunities... rather than selling existing positions.
To be clear, this is not the consensus view of the market.
The herd is bracing for more pain. They expect the bear market to continue. As a result, most folks are loading up on cash and buying market protection.
Consider Bank of America's monthly Global Fund Manager Survey. This survey polls some of the top fund managers in the investing world, who handle billions of dollars in assets. And it tells us what parts of the market they're bullish on, what they hate, and what scares them today.
Over the past few months, the survey has shown that fund managers are wildly bearish.
They're hiding in cash – even more than at the height of the financial crisis. Take a look...
Individual investors are also running for the hills. According to financial-services firm Refinitiv Lipper, investors pulled more than $27 billion from equity mutual funds and exchange-traded funds in a single week in December.
It was the 10th-largest one-week outflow in two decades. And it was the largest December outflow ever, more than Christmas week 2018 – a time when markets were in the midst of a quick 19.8% drop.
We're also seeing investors dump money into market protection. Specifically, folks are buying put options at an unprecedented rate.
Put options act like a form of insurance against falling stocks. They can soar in value while markets are declining.
Today, we're seeing an all-time record of folks buying puts instead of call options (a bullish strategy). Take a look...
Your brain is wired to follow the herd. Fight this urge. Flip the way your brain wants to work.
As a general rule in investing, you need to do the opposite of the herd.
This contrarian mindset takes courage. You're fighting your amygdala, shaped by tens of thousands of years' worth of survival instincts.
But being a contrarian when investors are scared often leads to massive gains. And we're seeing plenty of fear today.
While we don't think markets will go straight up in 2023, it does make sense to look for buying opportunities given the high degree of bearishness from the herd.
In investing and in life, wait a tick before following the herd. The impulse to run is there, but there's no saber-toothed tiger about to strike in the modern world. Take your time and think.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: According to critical new data, the market could make a huge comeback this year. But that's not the biggest surprise we're likely to see in 2023. You see, many of the winning stocks of the past decade could soon be left behind... even as the overall market soars.
Brett Eversole and Dr. Steve Sjuggerud recently shared why all of this is possible – despite what most investors expect – and how to navigate what's coming. Get the full story here.
Further Reading
"If you wait until inflation, war, interest-rate hikes, and the threat of recession have all subsided, stocks will have started soaring without you," Doc writes. That's an important part of how bear markets end. By the time the fear passes, the biggest gains will likely be over... Read more here.
"The signs of a recession aren't showing up yet in key measures like employment and spending," Brett explains. "But folks still expect the worst." Recently, one indicator showed just how big this disconnect is – and what it could mean for investors... Learn more here.
