Martin Pelletier: Investors can’t just be bull-market cheerleaders, or bear-market doom-sayers. Complex thinking helps avoid risk while seeking gains
As humans, our minds are designed to present options to us in binary terms. This is because dualistic thinking provides us with a sense of certainty.
The more complex something is, the less certainty we have, which causes anxiety about what lies ahead. We often end up overwhelmed by all the choices we must make and so we seek out comfort by narrowing it down into categories like right or wrong, black or white.
In his book Full-Spectrum Thinking, author and futurist Bob Johansen says the problem with this is that, while simplified categories may lead us toward attaining the certainty we so desire, it moves us away from clarity and understanding.
Neuroscientist and psychiatrist Iain McGilchrist takes this further by detailing the biology of our brains and the roles our left- and right-side hemispheres play in critical thinking. His book The Master and His Emissary: The Divided Brain and the Making of the Western World, is a masterpiece. It is a 600-page read but a Cole’s Notes version can be found in his paper called “Can the divided brain tell us anything about the ultimate nature of reality?”
The problem is that our left analytical side likes to think it is in charge because it is so good at analyzing various data inputs independent of one another. As a result, it isn’t uncommon for it to overrule critical thinking by narrowing down potential outcomes into binary ones simply because it is unable to do what the right brain is made for: tying all the data together into a big picture that may, in actuality, be some shade of grey.
“So the left hemisphere needs certainty and needs to be right. The right hemisphere makes it possible to hold several ambiguous possibilities in suspension together without premature closure on one outcome. These are not different ways of thinking about the world: they are different ways of being in the world. And their difference is not symmetrical, but fundamentally asymmetrical,” McGilchrist writes.
However, society wants us to choose a side. Social media platforms such as X are specifically designed to take advantage of our left-brained dominance by bombarding us with the dualistic information that we so desire. Worse yet, we allow it to form a part of our identity and so, when questioned, we defend it at all costs, unwilling to listen to the other side because our right-brained hemisphere is cut off and no longer in charge.
For example, it isn’t a secret that I have been quite critical about the damage being done to the Canadian economy by the existing Trudeau government. However, this should not imply that I am supportive of those leaders or governments with economic policies on the other end of the political spectrum.
I have also been supportive of oil and natural gas development, but that doesn’t imply I am a disbeliever in global climate change and the importance of renewables, even from an investment standpoint. Not surprisingly, I have had people on both sides unable to fathom how I could be investing in oil and gas while I was living in an eco-community and a near net-zero home.
Such thinking can get a person into a lot of trouble when it comes to investing. This is because we can get sucked into making binary “I’m right and you are wrong” decisions, such as in today’s environment of either being all-in on the high-flyers like Nvidia Corp., bitcoin or MicroStrategy Inc. or choosing to be on the sidelines listening to the few remaining doom-and-gloomers calling for a large market correction.
I find it helps during such situations to ask, “If someone else was in my body and seeing what I’m seeing, would they be interpreting it the same way or differently, and if so, why?” There is so much power in putting yourself in the other person’s shoes and trying to see things from all sides.
Aiming for clarity minimizes mistakes but it doesn’t mean they won’t happen, as we’re human, after all. However, the more we exercise our right brain, the better we can get at minimizing the damage when getting it wrong by quickly identifying any errors we have made and pivoting back toward the right direction.
With practice, suddenly what others do and say have less of an emotional impact on our decision-making process. We can then map out the risks and rewards with less fear of the uncertainty of what lies ahead.
Having a goals-based approach to investing is a great way to do this, as it helps one avoid potential traps in a market environment that can be quite complex and potentially very dangerous at times. This means examining what target return you need to achieve to fund your financial goals and objectives and then targeting investments with the lowest associated risk. This places you in a position separate from everyone else by not exposing yourself to things like the fear of missing out and chasing returns to play catch up.
This is why we prefer asymmetric investment strategies like structured notes and option overlays, that protect us from ourselves. It keeps us invested in the markets but with embedded downside protection, which proves its long-term merits during corrections. Having an independent, risk-managed approach isn’t for everyone, but it sure is helpful in removing the anxiety in a world that seems filled with it.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.
