The dopamine portfolio vs. the serotonin portfolio — do you know which one you have?
The rapid rollout of new technologies over the past decade has been incredible to watch. Everything is getting that much faster, especially when it comes to how information is processed, analyzed, delivered and shared thanks to smartphones and social media platforms.
However, these developments are changing our lives in ways that go beyond just the simple spread of information. Many of us now simply give in to the desire to respond instantly to new inputs, instead of taking the time to properly analyze their longer-term costs or benefit.
What worries us is that this tendency is showing up in the markets, as investors who once took a proactive and thoughtful approach are quickly turning into reactive traders — a trend that will only get worse as new technologies such as Blockchain are rolled out.
Settlement times will soon be cut from days down to seconds and, when combined with the rapid growth of Exchange Traded Funds, it will become that much easier to move into and out of trendy or once-trendy positions as we react to the information du jour.
Robert Lustig, an endocrinologist and author of The Hacking of the American Mind: The Science Behind the Corporate Takeover of our Bodies and Brains, explains this type of activity by delving into the human psyche, describing how the pressures of today’s society (social media etc.) has turbo charged our pleasure seeking dopamine receptors at the cost of longer-term serotonin-fuelled happiness.
“Dopamine is the “reward” neurotransmitter that tells our brains we want more; yet every substance or behavior that releases dopamine in the extreme leads to addiction. Serotonin is the “contentment” neurotransmitter that tells our brains we don’t need any more; yet its deficiency leads to depression.”
Given the recent advances in new technology, this makes now as important a time as ever for an investment portfolio gut check to see if it has been built on immediate pleasure seeking or focused on longer-term happiness — a dopamine portfolio or a serotonin portfolio.
The dopamine portfolio is one that is focused on instant gratification and built on emotions such as the fear of missing out (FOMO). It is visceral, hands-on, highly euphoric and almost addictive. In extreme cases new deals are actively sought out as one must own the hottest sectors, which in today’s environment could include marijuana, cryptocurrencies and robotics.
The problem is that euphoria results in irrational activity. This isn’t something new as I’ve personally witnessed this during my days as a sell-side energy analyst in the mid-2000s as spinout junior E&Ps from Trust conversions were actively bought up by investors at 3 to 4 times net asset value. I even saw a blind pool with a research report target multiple at 2 times cash!
There are also more modest dopamine focused portfolios built on old fashioned return chasing, which means trading into and out of positions based on recent performance. For example, we witnessed investors herding into Canadian equity funds in early 2017, while now they are herding out of them.
On the other hand, a serotonin portfolio is one built with a longer-term outlook, one that is not greedy and sets a target return not influenced by what others are doing. It is often well diversified between active, passive and risk-managed strategies with allocations made by looking forward and measuring the risk versus return potential. This isn’t to say that it can’t hold a few exciting dopamine positions, but they certainly don’t dominate the portfolio.
Investments are also held for a longer period of time and aren’t actively traded unless there are major changes to one’s personal circumstances, such as requiring more liquidity or income.
Overall, while the pace of information has accelerated it doesn’t mean your decision making process has to keep pace. Instead a patient proactive approach is one that may not be euphoric in nature but sustainable in the longer term.
However, if you find yourself in need of a quick stock market dopamine hit, you might want to remember the old saying that: “Your best trade is often the one you didn’t make.”