As a marketing professional, his work is designed to further the understanding of consumer behaviour and the associated decision making processes.

Rapaille analyses exactly why certain brands consistently outperform others across various markets and in his book “The Culture Code” he talks about how deeply ingrained cultural beliefs can influence our decisions and purchasing habits in ways that, to the most part, we remain completely unaware of. His clients include many in the top 50 of the Fortune 500 companies.

But as investors it could be argued that the decisions we have to make are far more critical than mere retail purchases since they have the potential of directly impacting our fortunes - even our very survival - in the financial markets.

So could, therefore, an appreciation of Rapaille’s theories help us to better understand our decision making processes and thereby sharpen up our own game? We believe there is much in his work which can be directly applied to our own mental processes as investors and in this article we will take a closer look at these parallels. In Part 1 we will take a general look at Rapaille’s theorised Reptilian brain as it relates to us as investors and in Part 2 we will look at the significant challenges investors face in today’s volatile markets and how we can best equip ourselves mentally.

Part 1 - The Reptilian Brain

Rapaille describes three distinct brains: the Cortex, Limbic, and Reptilian.

Beneath the cortex, the seat of logic and reason lies the Limbic, which houses our emotions. Camouflaged underneath those is Rapaille’s theorised brain—the Reptilian. Only accessible via the subconscious, the Reptilian brain is the home of our intrinsic instincts which, as with all species, is solely concerned with Survival and Reproduction. Rapaille’s mantra is based on the fact that our survival and reproductive instincts will override all else. Hence “the Reptilian brain always wins.”

As a marketing professional, Rapaille believes that our buying decisions are strongly influenced by the Reptilian brain. But as Investors however we don’t just make buying decisions; we also need to make decisions when selling our stock and as such we are susceptible to the Reptilian’s influence on both sides of the trade.

Investors will be familiar with the greed and fear driven nature of the markets. Well Rapaille’s theory gives us a way of understanding these “drivers”, specifically in terms of how our instincts will evoke fear in response to danger and greed when presented with an opportunity.

But most investors will realise by now that the financial markets don’t operate in accordance with the same rules which ensure the survival of the species; if anything, when it comes to our survival in the markets the rule book gets flipped on its head.

Unlike the outside world, in the financial markets the best opportunities are usually found when fear is palpable and we also know the best time to sell out of our positions is when we feel most comfortable with them. But the Reptilian brain (i.e. our instincts) is programmed to make us run from fear and head for comfort.

So if we are to have any hope of becoming effective as investors we will need to face up to the fact that our Reptilian brain is not best suited for dealing with the machinations of the financial markets and we therefore need to stay firmly in control of all its innate urges - and you thought that giving up cigarettes was going to be tough!

This notion was best put, perhaps unwittingly, by Rudyard Kipling in his seminal poem “If”:

“If you can keep your head when all about you are losing theirs?”

The Money Metaphor …..

Investing is about money and as such it is more than just symbolically linked to our survival and reproductive instincts. The investment process embodies our ambitions hopes and dreams, our desire for security, power and freedom, and much more besides.

That’s why, as Private Investors, we take our investments so personally. As far as the Reptilian brain is concerned, our wealth and our investments are actually part of us and, as such, financial risk and physical risk are indistinguishable.

And it’s these primal instincts, rooted deep in the subconscious, that drive our need to better our circumstances by looking for investment opportunities to give us the chance to grow our capital and thereby improve our lives.

As stated earlier, the two fundamental Reptilian instincts are to survive and reproduce. That’s all any reptile cares about. So in terms of our investment behaviour these instincts correlate as follows:

To Reproduce = to make money

To Survive = to not lose money

Image by Neotex555

So what about the Limbic Brain?

According to Rapaille the Limbic is the part of the brain which houses our emotions and controls how we respond to and express our feelings. It’s by subliminally appealing to the Limbic that those clever advertising people gain access to, and trigger the desired responses from the Reptilian brain buried deep within its core.

Pretty much everything we set out to do in life is to generate (or avoid) a feeling – none more so than the pursuit of making money. We want to make money because making money can make us feel good. Or put another way, lack of money can make us feel bad. Often very bad indeed. Making money covers pretty much all of our bases; it gives us choices and thereby represents both freedom and security.

We also have to recognise that our feelings, at any point in time, will dictate everything about the way we engage with the world around us. Emotions are key to our learning process. The stronger the emotion, the more clearly an experience is learned. If you simply tell a child that a plate is hot, the lesson will be nowhere near as powerful as the experience of scalding one’s fingers for the first time!

If you recall the first time you ever made or lost a significant sum of money on the markets you will no doubt also recognise the truth in this. How did it make you feel? If the experience was a joyous one then the urge would no doubt be to repeat the experience to recreate the same feeling. If it was painful then there will hopefully have been a lesson there somewhere to avoid that feeling in future!

But it is also a fact that the more intense our feelings, in the moment, the harder it is for us to remain in control of them and thereby stay rational, and when it comes to dealing with our investments therein lies a significant challenge.

When invoked, our feelings will vie for dominance with the rational part of the brain, the Cortex. If we allow them to gain the upper hand, so to speak, they will potentially cloud our judgement. This is the investing equivilent to driving whilst under the influence.

Emotions will make us feel brave (and sometimes even bulletproof) when the rational position should be one of caution. They can also make us fearful when an opportunity is there to be seized.

There is no better place to watch emotions playing out than on financial bulletin boards like ADVFN, especially when a fast moving stock is in play.

These forums are the virtual embodiment of the Limbic brain. When a share goes on a run (remember that?), emotions run high and the boards are swamped with thrill seekers. The emotion is palpable. A disciplined and experienced investor will of course be taking this in his stride.

Canny traders often use high emotional states to their advantage; playing with the sentiment, which is rather like giving high sugar drinks to overtired children.

Those caught up with heightened emotions, will not even realise they’re being played. If the sentiment is positive, the motive is to whip up excitement and buying volume in order to exit a position on volume, whilst on a down day they would be looking to dampen sentiment further in order to gain a cheaper entry point.

To get the most out of such forums, it’s probably best to limit ones engagement to sharing research, analysis and discussion; and definitely avoid engaging in arguments, and emotional ups and downs caused by market machinations. Unfortunately few of us can claim to have not, at one time or another, been caught up in the emotions of the moment.

Engaging the Cortex!

So we know that in order to be effective in the market we must be able to think and act rationally at all times. Obvious right? That’s why we conduct hours of painstaking research and when we do make our investment decision, we are secure in the knowledge that the decision was reached on the basis of thorough rational analysis. We deployed the Cortex, the seat of logic and reason (the only part of the brain capable of such a task) and the results of our rational research should be enough to ensure we remain grounded.

But when the market is moving, it’s easy to forget the rational decisions we previously came to as we allow share price movements to trigger emotional responses from within us. When our shares are going up do we not wish we held more? Greed may perhaps encourage us to add to our position? And when our share drops suddenly intraday as a seller appears in the market, do we allow the fear to feed our insecurities? Perhaps the seller knows something we don’t? Should I be dumping my positions as well?

But surely if, on the basis of our research, the rational conclusion we came to was to be invested and if it is our emotions (and nothing but our emotions) that are trying to influence us to sell, then how rationale can that be?

Of course in Mr. Rapaille’s line of work, emotions can form extremely effective drivers for our purchasing decisions, and in that context, when our emotions are driven by the Reptilian brain’s primal urges, the cortex doesn’t stand a chance.

It is no coincidence that the teenage market is the most responsive of all markets to sophisticated advertising campaigns – subliminally targeting the Reptilian by appealing to the emotional Limbic brain.

Consider this. Would a commercial for deodorant be half as effective if it didn’t suggest that it would enhance a young man’s chances with the opposite sex?

Rather than claiming that “spraying this under your armpit will stop you from smelling like a bowl of oxtail soup”, the commercial actually suggests that the minute you take the lid off the can, you will be chased down a tropical beach and ravaged by 2,000 sex-crazed half naked women.

This potential outcome, is directly aimed at a teenager’s hopes and dreams and, however remote its likelihood, it has far more appeal than the cold truth that the best anyone can expect from a tin of deodorant is that, until its effects wear off, all it will it do is mask some of the wretched odours emanating from ones armpits! (Ed: speak for yourself!).

So does our teenager actually believe this product will make him irresistible to the opposite sex? Of course not. But all the time he is watching the commercial, it is the Limbic part of his brain, not the Cortex, that is engaged, whilst at the same time responding to the images on the screen by sending impulses to the Reptilian brain. The Reptilian brain will, for obvious reasons, respond positively to these impulses by giving a big thumbs up to the idea of an encounter with half naked women. Reptiles aren't that smart, but they do know what they like!

And as we know, the Reptilian always wins".

Whilst one wouldn't expect grown adults to succumb as would a teenager to such methods of persuasion, this example does demonstrate how susceptible to influence our decision making process can be should we allow our judgment to be influenced or distracted by emotions at any level.

Of course there is one sure way to maintain composure in the market come what may - and never let the Reptilian brain get the better of us. It’s quite simple really. And that is to never invest or play with more than one can very comfortably afford to lose.

If we are comfortable at all times with our position then we can sit back, un-phased and let the markets do their worst.

And if that scenario doesn’t sit too well with you, (after all how can anyone ever actually know how much they can truly afford to lose?) or perhaps it’s simply a touch unrealistic given the excesses of  your personal risk appetite, then better for you take a leaf out of Rudyard Kipling’s book:

If you can make a heap of all your winnings

And risk it all on one turn of pitch-and-toss

And lose, and start again at your beginnings

And never breathe a word about your loss”

As they say, its only money!

 

Part 2 Enter the Speculator

Wikipedia defines the practice of Speculation as follows:

‘A financial action that does not promise safety of the initial investment along with the return on the principal sum’

We are to understand from this statement that speculation is by its very nature high risk action with no promise of safety.

Yet by inference this would suggest that investing in contrast to speculating can offer a promise of safety? The question then is when does investment become speculation and vice versa?

In the resources sector, particularly in the junior space, it’s pretty much all speculation in the sense that we are usually betting on an outcome that will potentially create a value crystallisation event returning a multiple of our initial stake. And if that doesn’t happen then we lose our money.

Perhaps then we should consider ourselves “Private Speculators” rather than Investors? But then again if you can effectively lose your shirt by investing in some if not all of the world’s largest banks, should we not consider any investment, no matter how blue-chip, as simply speculation??

It is also worth noting that the starting point to this article is the view that our effectiveness as investors is ultimately down to understanding our own minds and recognising the importance of our own mental discipline. There are a myriad of trading aids and tools available to investors which will all claim to give us an edge when it comes to forming or timing our investment decisions. The problem with all of them is that they are generic and ultimately none of these tools can ever compensate for any weaknesses in our own decision making process.

Such tools and aids are only going to be as good as the discipline we impose on ourselves to act on the outcomes they prescribe and it is our firm belief that as investors we are all unique and that understanding our own investor psychology, not relying on trading aids, is the first and most crucial step along the road to becoming effective in the markets.

The first lesson for any investor is to be prepared to make mistakes. If we don’t make mistakes, we don’t learn. The best we can hope for is to learn from where we went wrong and be able to mitigate any damage so that we are always in a position to pick ourselves up and carry on!

For many investors, particularly those entering the markets in the aftermath of the last market crunch in late 2008 early 2009, there was a period of definite feast in 2009 through 2010. In fact investors would likely have considered themselves Masters of the Investing Universe going in to 2011 when the gains continued, for quite a while.

This was particularly true for investors in Natural Resource stocks, some of whom saw incredible returns and certainly ample to reward those brave souls prepared to risk their capital at a time when the markets were looking doomed and highly unlikely to ever recover.

But as investors we are a fickle breed.  The onset of a downdraft in the market or a sector, howsoever caused, will invariably change our psychology on a fundamental level, ultimately leading us to do the exact opposite of what we ought to do to maximise our financial return.  That is to buy low and sell high (rather than our oft predisposition to buy high and sell low).

Despite the harkening calls of many famous investors to buy when there is blood on the streets or be greedy when others are fearful, few of us are blessed with the audacity and strength of character to do just that.  In fact it seems that just when investors are despairing, just when the sturdiest supporters of a stock are throwing in the towel and just when the malicious characters appear on bulletin boards to slander management and preach of the stupidity of their fellow investors for buying xyz stock – if you are ever going to, then THAT should be exactly the time to buy!

And it really is that definitive.  Because the world stock markets never change, there’s nothing new on Wall Street, as they say - or indeed on Paternoster Square, or any of the other financial districts anywhere around the globe.

Nothing changes and nothing occurs that has not occurred before.  Bull markets shift to bear markets and back to bull markets, sometimes in days, sometimes in years, but a switch always occurs and its always seems to happen when investors are least expecting it to.

The market can be a cruel beast, and investors would be wise to accept the limits on their abilities to beat the market in the long term (you won’t! And if you ever need evidence of this, just look at the myriad of fund managers who fail to outperform the tracker funds.  Such is the ability of investors to outperform the underlying indices forever).

But it is possible to beat the market for a while; to do this requires a degree of resolve and determination and most important of all, discipline – which is where most will find the greatest challenge.

For the truth of investing is that when we feel most comfortable with our portfolio, that’s the time we need to take stock very quickly because the cliff is approaching and we are hurtling towards it, without being able to see the precipice.  Likewise when we are shocked to the core with fear, or in the depths of despair, feeling like we are unable to make the right decisions, then we need to recognise that that’s the point when we could be on the cusp of a major turnaround in fortune.

So, there is one question we need to address.  How scared do you feel right now?

The answer to that question, perhaps when assessed across a wider investor base than just yourself, will determine just where we are with this pullback and when we are likely to return to reasonable capital appreciation.

And whilst we wait those positive times ahead, these are some of the signs to look for as indicators that the market is close to turning:

 

1. Stock prices have fallen to a level that you would have hardly believed possible (and then the next day they drop 10% more);
2. Volumes are generally low and smaller sell transactions see a price fall by an inordinate amount;
3. Good news is hardly reflected in an upward movement in share price and when it is, the upward move is short lived often falling back quickly on little selling;
4. Bad news has a disproportionate impact on the share price (and people openly can’t believe the share fell so much on that news);
5. Discussion forums become awash with aggressive postings from highly distressed investors and some near lunatics anticipating a share will fall to 2p from its current 8p level, (no reasoned rationale provided);
6. Management, once praised, are attacked by thoughtful posters and the lunatics above and accused of mismanagement and apparent loss of the halo effect (normal business life is peppered with ups and downs, the latter being accentuated in times of poor market conditions);
7. Your portfolio was  25, 33 or 75% down, and the vast majority of stocks are impacted, it’s not stock specific adjustments, everything is hit;
8. You have stopped talking about the stock market with your peers or family, in fact you feel somewhat ashamed and embarrassed about the whole business;
9. Your thoughts are focussed on the past, you can’t think to look to the future;
10. When the market goes up you don’t believe it’s going to hold and it doesn’t;
11. When the market goes down you believe it will continue to fall and it does;
12. You feel like a fool for not predicting all this market chaos;
13. You consider a full or partial retreat from the markets is in order;
14. You stop watching the news as it’s far too negative and another dreadful business report is only minutes away;
15. You stopped buying the newspapers and even stopped reading them for free at the supermarket because the front page is all about financial chaos;
16. You dread your husband or wife asking you how things are going, as  it’s probably too bad to even discuss;
17. Your portfolio has gone long term, (and the real you wants jam literally tomorrow, but it seems to be slipping away);
18. You actually stopped looking at your portfolio a while back and haven’t calculated its value for a while – in fact the last calculation was a month ago and you are frightened to look because you know it has fallen through the floor since;
19. You begin to look enviously at people living in fine houses or driving the best cars (don’t worry they are probably leveraged up to the hilt);
20. You wish you had never come across the t-trade;
21. You turn off more lights at home to save money and buy cheaper groceries, or shop in different stores;
22. You start to calculate the average government debt per head of adult population and get very worried;
23. You buy extra tins of baked beans and soup;
24. Well we could go on but you get the general idea……

Of course what we all would like to see are the stocks we hold on a steady upward growth trajectory.  A higher share price means more money and a more comfortable financial position.  But it also means much more.  It means we were vindicated in our investment decisions.

Being wrong in the stock market can be a painful burden to carry. Not only does being wrong affect our personal pride and self-esteem but we see our paper wealth frittering away before our eyes.

But how wrong can we really be, if our investment decisions were based on fundamentals - which are still intact?  We told ourselves that inflation and uncertainty are going to be a running constant for a long time to come and that in the long term the price of gold and all commodities will be going a lot higher than they are right now.  Have any of these fundamentals really changed?

Recently WTI oil crossed over the $100 a barrel mark once more and gold at the time of writing is around 25% up on the year - having been almost 40% up.

In most sectors, when the market fundamentals improve substantially, valuations of the business’ that benefit will also tend to increase.  However, the markets in the Natural Resource sector are currently displaying some significant inefficiencies, but that doesn’t mean this will always be the case.

The explorers are more remote from the market price, but the leverage available to explorers, especially those with significant resources in the ground, is tremendous.  Arguably therefore higher prices for oil, gold, etc. should eventually feed through to the explorers, driving them significantly higher as well.

The market does play catch up of course and it is never a smooth ride along the way.  Right now prices are low, but because markets are inherently irrational, they could go lower still.

But right now we see limited downsides for many stocks and an upside that will likely surprise even the most optimistic.  Natural Resource stocks may be under pressure at the moment and investor sentiment may be the lowest it has been in a while.  But the bigger money has been, and surely will always be, made in the waiting. This means buying when nobody wants a share and selling it when everybody does.

This article was written by the MiningMaven team, who like most investors hold Natural Resource shares and for whom points 1 to 24 above are just as relevant as to everyone else!

Out of politeness, perhaps we should sign off cordially wishing our readers “Safe Investing!” or some other such pleasantry? But given that in today’s market there is probably no such thing, in the words of Michael Conrad of Hill Street Blues fame– lets be careful out there!

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