"This Time It's Different" In Love And Stocks - Valentine's Day Edition
It’s Valentine’s Day – a unique combination of Hallmark Holiday, celebration of romantic love, and source of self-loathing angst, all depending on your personal situation. And in that Rorschach test located in the local drugstore’s greeting card aisle, ConvergEx's Nick Colas finds some useful lessons about investing and economic development. Most divorced Americans remarry, for example, within four years of the end of their first marriage. Any surprise that investors are looking to hitch up with stocks again, some six years after that messy divorce in 2007? More scientifically, the brain functions of people in love use the same bits of the cranium as we all light up when assessing the pros and cons of a given investment. “Don’t fall in love with your positions” is good advice. Lastly, ETFs and online data show that technology can change something as established as investing... Or finding your better half.
ConvergEx's Nick Colas: Love, Rain on Me
Despite its reputation as a couples-only destination, Valentine’s Day is actually remarkably inclusive. If you are happily involved in a relationship, you celebrate the life of Saint Valentine. In his prime, sometime in the third century A.D., he was a Christian priest in Rome who had a lively trade in marrying his fellow religionists. Since Rome was still pagan at the time – and unfriendly to Christianity – this was a daring act. So we celebrate the man who risked his life so others could be joined together with the blessing of the nascent religion of Christianity.
And if you are “In between” relationships, and perhaps embittered that there is a specific day to celebrate something you don’t currently have, consider that St. Valentine got his sainthood in large part because he was gruesomely martyred. By one version of the story, he was apprehended by the Romans for his practice of the still-illegal religion. A charming man, he actually befriended all and sundry in authority and they were inclined to let him off with a strong warning. And then he tried to convert them to Christianity… Things went south for him after that, and he ended up meeting a gruesome death – beaten until not quite dead, and then slowly beheaded just outside the gates of Rome.
Love, as we know the concept today, is a bit more modern than poor Valentine and essentially dates to the Middle Ages in Europe. The notion of ‘Courtly Love’ – aristocrats who got to pick their soul mates based on character and affinity, rather than loveless arranged marriages – was first limited to the nobility. The typical storyline is ‘Wealthy royal woman wooed by poor but noble knight when husband away killing Muslims at a crusade. Advances first repulsed, due to marriage to infidel-slayer. Later, love consummated.” Yes, things have changed a bit over the last 500 years in the ‘Ideal love’ business, but the kernels of the story – two people who share a deep emotional connection – is the bedrock of modern romance.
That concept – that people should be free to do what they want – also spilled over in the Middle Ages to matters economic as well as those of the heart. You probably remember from high school history the ‘Guilds’ of the Middle Ages – trade groups who acted as prototypical university, fraternal order and social club – as another emblem of individual self-destiny. If you wanted to learn a trade as a young man, you apprenticed yourself to a blacksmith, stone mason, or whatever livelihood was on offer in your town. After a period of years, you might gain entry to the guild and be able to make a living in that profession rather than remain stuck in the agrarian countryside as a small lot farmer.
Fast forward a few centuries, and the intersection of love and commerce is still a useful waypoint to understand human behavior. Consider the following points:
#1 – Divorced people usually remarry. In a 2006 presentation to the American Sociological Association, a U.S. Census Bureau staffer reviewed data on the topic of the domestic population’s tendency to remarry after divorce. While I might rightly be accused of using a survey size of one, it is not unreasonable to believe that most people who undergo the emotional strains of divorce are tempted to decline a return trip up the aisle at any price. And yet, most eventually put on the tux or fancy dress and sign up for another stint. In 2004, for example, 36% of marriages involved at least one person who had been previously part of another “Mr. and Mrs.” As recently as the late 1980s, half of all divorced men were remarried within five years of their divorce, and 45% of all women. More recent data shows that second marriages end before “Death do they part” than firsts – about 65% versus 50%. And the third time is distinctly not the charm – approximately 75% of those unions end in a lawyer’s office.
The bottom line –or one of them, anyway – is that people work inside of their comfort zone and are happy to believe that “This time is different” even though the actual math isn’t all that promising. In the world of investing, consider the link to the recent trend of money flows back into U.S. equity mutual funds. Investors had a nasty divorce from this investment category back in 2007, of course. And for the last six years they haven’t forgotten the sting of that separation, removing $610 billion in capital from these funds. But now, it seems as if they are willing to give it another try. January 2013 saw positive flows for the first time since April 2011. Yes, the first week of February is a little slower – only $683 million, rather than the $3-7 billion in weekly inflows from January – but with tax refund season now hard upon us, the next few months should remain positive.
#2 – Love and investing use many of the same bits of the brain. A November 2000 academic paper entitled ‘The Neural Basis of Romantic Love’ (Bartels and Zeki) reviewed what happens when you submit a person in love to an MRI exam. The upshot is that several parts of the brain – the medial insula and the anterior cingulate cortex, the caudate nucleus, and the putamen. What’s notable about those clusters of grey cells is that they also run the decision-making and other “Rational” parts of our lives. The old Jimi Hendrix lyric, “Is this love baby, or is it just confusion?” is remarkably accurate.
How many times has someone told you “Don’t fall in love with your positions?” Now you know part of why it is so hard to avoid that common error – the part of your brain that feels amorous emotion is way too close to the part which tries to be rational. To get over that linkage, remember that you own a portfolio of stocks. Remaining stubbornly loyal to an idea isn’t the modern version of ‘Courtly Love’; it’s just dumb. And on the flip side, the portfolio approach seldom works in one’s personal life. Diversification there (unlike in modern portfolio theory) actually increases both risk and costs.
#3 – Technology changes everything, at least a little. Survey work by Reuters, PC World, the Washington Post and others (summarized here: http://www.statisticbrain.com/online-dating-statistics/) shows the power of online dating. Match and eharmony have a total of 35 million members. They collectively prefer blondes (32%), with women looking for “Nice guys” (38%) and men seeking “Modern Career girls” (42%). A recent cnbc.com article notes that 5% of U.S. marriages started as an eHarmony date and over half a million unions around the world start the same way. And if things don’t actually get to the altar, a website called “I Do, Now I Don’t” (http://www.idonowidont.com/home) will let you sell your engagement ring, wedding band, and/or dress with the same efficiency as you found your almost-spouse.
The world of investing is no stranger to the desire for efficiency, targeted searches and reduced discovery costs (three benefits of online data). Exchange traded funds offer the same advantages, along with some distinctly unromantic benefits such as the ability to hold more than one in a portfolio. Year to date flows into ETFs total $33.4 billion, with $30.6 billion into equity products. That is over $1 billion/day so far in 2013, handily beating the one year average of $540 million/day. There’s some seasonality there, to be sure, but there’s no doubt that investors see the utility of a prepackaged answer to their investing needs. Just as they see the benefit to searching for a future spouse who meets their basic requirements.
By way of a quick conclusion, what I have tried to chronicle here is a central observation to a lot of the work we do in these pages: investing isn’t any different from many of the other decisions we make in our lives. Love, heartache, winning investments, losing positions – it matters not. Our decisions in life all filter through the same personality.
There’s an old saying: “What does every bad relationship you’ve ever had share in common? You.” More optimistically, all the good ones have the same feature. And on this St. Valentine’s Day, whether you are alone or with someone, it pays to focus on that happier sentiment.