11 Oct 2019 This Is Your Brain On (Financial) Drugs
In 1987, The Partnership for a Drug Free America released one of the most famous commercials in TV history, featuring an egg in a frying pan and the dramatic line: “This is your brain on drugs.” Like most ad campaigns of this genre it didn’t actually prove to be effective at curbing drug usage—and in some cases may have even done the opposite—so don’t worry, I’m not advocating for a money-themed version to be released. (If I did, though, I would probably just show footage of a toddler going through the various stages of a sugar high and subsequent crash.)
But here’s the thing: while certainly not as tragic as our nation’s opioid crisis and the many ways that drug addiction can ruin families and communities, financial drugs are still a real source of pain, and while an ad campaign might not change that, I think it’s still important to talk about.
Financial drug usage is so pervasive that the hardest part of writing this post is keeping it under five thousand words. There’s an entire cable network devoted to 24/7 dealing, paper and internet headlines shamelessly devoted to the same, and social norms which make an addiction to these drugs not only acceptable, but in many cases lauded.
All that being said, I want to take a look at two types of drugs in particular today and use two recent stories to help illustrate them. Then hopefully my advice in the closing paragraph will prove useful in preventing you from ever getting on these drugs in the first place or help you wean off of them if preventative measures are too late.
The first drug—I’ll call it The Koolaid—comes to us from the ongoing soap opera/financial drama/trainwreck that is WeWork. For those of you who haven’t kept up with this story, WeWork is a tech company that found a potentially profitable space within the rental real estate sector. I say potentially profitable because they have done nothing but hemorrhage cash, though I can’t rule out the possibility that they will ever actually make money. Among other revenue streams, WeWork buildings largely rent out single desks over short periods of time to folks for whom traditional office space is either unnecessary, too expensive, or not cool enough. The great debacle of WeWork for our purposes today (and honestly it’s impossible to distill this, you could read this New Yorker piece on the founder Adam Neumann to get a better idea of just how weird things got) is basically, there was a promising new product, a slightly delusional founder, a venture capitalist who gave the company obscene amounts of money and encouraged the delusional founder in his delusions, and finally for now, perhaps one of the more embarrassing failed attempts at an IPO in history. Many people will be fired.
The Koolaid is the tremendous willingness of investors of all stripes, from professionals to regular Joes (they are mostly Joes), to believe in and put massive amounts of money toward a cool story over and above strong financials. Generally there is a great deal of cult-like groupthink to accompany The Koolaid, not to mention a charismatic leader who speaks in strange, quasi-spiritual sayings. If you don’t drink it, you will be met by pretension as those who have drunk it will laugh at your caveman tendencies. But just remember, it’s not the professionals and venture capitalists who get the worst of the fall from grace if and when it happens. They almost always get second chances. Your savings almost certainly do not.
At Beacon we don’t advocate for taking positions in individual stocks for a number of reasons, most of which fall under the heading of “Too Risky.” But be especially careful of trying The Koolaid and falling prey to the hype of a company like WeWork. It doesn’t even need to be a startup! It could be an established company with a proven track record. The key is that by the time the hype machine has dispersed The Koolaid to the public, the stock market has already priced the hype. In other words, even if it was a good opportunity, you’re too late.
The second drug—let’s call it Debbie Downer—is almost the opposite of the first. Instead of the charismatic hype of The Koolaid, it’s a slow burn cycle of fear and hand wringing. Like Carolyn Gowen writes in this excellent blog post, Debbie Downer is like a “nocebo,” which produces “negative health results through psychological or psychosomatic factors such as negative expectations of treatment or prognosis.” Debbie Downer has been especially prevalent over the last few years and is reaching a feverish pitch with prognostications about a recession in the face of an inverted yield curve. There are all sorts of reasons why people predict recessions, but at the end of the day the reasons don’t matter all that much. There will always be people (often the same people, no matter how often they’re wrong!) who are perpetual believers in the downfall of the economy and/or the stockmarket, and since bad news sells, these people will always find a public forum to spread their beliefs.
But being a regular user of Debbie Downer will generally lead you down worse roads than the event (recession, stock market crash, etc.) that its dealers are selling. Like the great Peter Lynch said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” There are two broad reasons this is the case: 1) Over reasonably long periods of time the stock market as a whole generally goes up, rather than down, and 2) Even if it was possible to predict when bad things will happen, pundits are almost always predicting the wrong things and therefore the wrong “preparations.” Thus users of Debbie Downer end up like a prepper who spends their whole life preparing for nuclear fallout in an underground bunker only to find they wasted their time and in fact what they needed to watch out for was a flood.
At Beacon we aren’t going to make any attempt to tell you that bad stuff won’t happen. It definitely will! We just have no idea when, whether tomorrow or five years from now, and we’ve yet to find anyone who does. But we also won’t suggest the route of a prepper, because not only do we not know what the bad stuff will look like, but also history has generally not been on the side of pessimists. The pessimism of Debbie Downer sounds like wisdom, but it leads to frustration and eventually obsessive, destructive behavior. Instead we advocate for taking advantage of what we know, making our best educated guesses about the rest, and having a plan to adapt quickly to change.
So how do we prevent an addiction to or wean ourselves off of these financial drugs? I think it comes down to two actions. First, while I don’t advocate sticking your head under a rock, I would be very wary of consuming significant amounts of economic or market “news.” Because of the very nature of markets, these media pieces are almost all just opinion pieces seeking to translate an actual news event (impeachment, negative yield curve, China trade talks, etc.) into a specific macro or micro prediction. If you can consume that stuff with an interested detachment, fine (though I would suggest many other more interesting things). If not, turn it off. Secondly, and more importantly, no matter what or how much news you do consume, always remember to reframe that consumption through the lens of your financial plan. Most of the time, even if the “news” is anything more than the shameless euphoria of The Koolaid or the fear mongering of Debbie Downer, it’s not something we can act on with any positive effect to the values and goals we’ve set before us and the people we share those values and goals with.
As with most things, it’s best to keep away from extremes (and drugs). Let us know if we can help you find a more even keeled and yet ultimately more meaningful approach to your finances.