Why is the good news so bad?

One of Wall Street's oldest maxims is: "buy in rumors and sell in news." "

The theory behind this clich é is that the stock market rises when smart investors generally believe that something big is about to happen. Then, once the public learns the good news, savvy investors will sell at high prices and share prices will fall.

There is some truth in this, but it may have more to do with the expected circuits in everyone's brain than with the extraordinary brainpower of a few big investors.

Celera Genomics (Celera Genomics Group) is a vivid example, with its share price soaring on hope but falling on reality.

On September 8, 1999, Celera began sequencing the human genome. By identifying one by one of the 3 billion base pairs that make up human DNA, the company could make one of the biggest leaps in the history of biotechnology.

As Celera's dazzling career began to attract attention, investors were full of expectations.

In December 1999, Eric Schmidt, a biotech analyst at SG Cowen, summed up the market mindset: "investors are enthusiastic about this industry and hope that today's story will drive tomorrow's economy." "

Celera's share price soared from $17.41 at the start of the sequencing project to a high of $244 in early 2000.

At a big news conference at the White House on June 26, 2000 (also attended by then US President George W. Bush and British Prime Minister Tony Blair), the chief scientist of Celera Genomics, J. Craig Venter, called it "a historic moment in the 100,000-year history of mankind": the company cracked the human genetic code.

But how did the company's shares react to the official news? Plummet! It fell 10.2% that day and 12.7% the next day.

Nothing has made the fate of the company worse. On the contrary, what Celera has achieved is a scientific miracle. So why did the stock market crash? The most likely explanation is that the fire of expectation can easily be extinguished by the cold water of reality. As soon as the long-awaited good news came out, the excitement disappeared.

The resulting emotional vacuum is almost immediately filled with a painful consciousness that the future is not as exciting as the past. As Yogi Berra famously said: "the future is no longer what it used to be. "getting what they want leaves investors with nothing to look forward to, so they quit and the stock crashes.

As of the end of 2006, Celera, one of Appleira's two stocks, was trading at about $14, more than 90% below its all-time high. This shows that if a company's biggest asset is investor greed, then buying its shares can be very dangerous.

Memories are made of money.

Researchers in Germany tested whether expectations of economic gains can improve memory in a dramatic experiment. Neuroscientists use magnetic resonance imaging scanners to scan people's brains and show them pictures of objects such as hammers, cars or grapes.

Some pictures are paired with a chance of winning half an euro, while others do not have any reward. Participants quickly learned which pictures were reliably linked to the prospect of making money. Magnetic resonance imaging shows that when these images appear, people's expected circuits start violently.

The researchers then showed participants a larger set of images, including some that had not previously been shown in the scanner. People can very accurately distinguish the pictures they have seen in previous experiments. They are also good at identifying which of these pictures predict economic gains and which have nothing to do with them.

Three weeks later, the participants returned to the lab. There, they saw the pictures again. This time, however, something surprising happened: although they had not seen the pictures for 21 days, they could more easily distinguish between those that indicated economic benefits and those that did not. The discovery shocked the researchers, who went back to re-examine the scan results from three weeks ago.

The results showed that potentially rewarding images triggered stronger activity not only in the expected circuits, but also in the hippocampus, which is responsible for long-term memory.

The initial fire of expectation seems to sear the memory of potential returns deeper into the brain in some way. "expected rewards are more important for memory formation than receiving rewards," says neuroscientist Emrah Duzel. "

Once you learn that a gamble can make money, you will remember the circumstances and expected stimuli, and the memory will be clearer and more lasting. Just as an artist uses spray to stabilize colors, expectation is a fixer for memory so that your memory of winning a reward does not fade over time.

For some people, memories of that good feeling may crowd out more important financial information, says Peter Peter Shizgal, a neuroscientist at Concordia University in Montreal.

He tells the story: "A psychologist I know had a patient with compulsive gambling who won about $100000 one weekend." He asked the patient, 'what is your net income or net loss?' The patient said, 'with a loss of $1.9 million, I invested a total of $2 million and finally won $100000!' "

Siegel explained: "the first part of his answer is completely unemotional. This part is the important information, but it has no effect on him. Only winning money in the end is really unforgettable and will continue to control his behavior. "

No wonder many of us look back on past investments and focus on bright spots comparable to Warren Buffett, when in fact, our real investment record is full of mistakes and losses.

Because earnings expectations help us remember our gains, looking back, investments with a success rate of only 20% tend to give us a good feeling.

As Takeshi Ono's mouse experiments show, expectations seem to be divided into two stages: the first is a review of memory, and the second is a hopeful prospect.

This explains why Laurie Zink never bought a lottery ticket before winning the Reality Show lottery, but then fell in love with playing the lottery, and why Mark Twain, for all his money, always wanted to make a fortune.

Control your greed.

How can the expected circuits of the brain avoid financial difficulties? First of all, realize that your expected circuit will get out of control, and that's how it works. So if the rest of your brain doesn't check and balance expectations, you'll eventually chase every hot spot that breaks out in front of you. In the long run, you get nothing but risks and losses.

The following strategies can teach you how to do better:

• On Wall Street, only one thing is certain, and that is, everything is uncertain.

Remember, your search system is motivated by the feeling of making a fortune, which prevents you from calculating the probability of getting rich. Beware of people who want to tempt you to be fooled with platitudes, including "double your wealth,"uncapped,"really going up," and so on. The higher the expected return on an investment, the more questions you should ask.

Start with this question: why do people who know this great investment want to let others know the secret? Then ask yourself this question: why does this rare investment opportunity happen to me?

And don't, I repeat, don't invest based on an unsolicited call from a broker you've never seen before. You have to say "no" and hang up. Please don't, I repeat, never reply to an unsolicited email encouraging you to invest. Delete this email directly and don't open it.

• Luck seldom likes you twice.

If you've ever tasted the benefits of getting rich suddenly, you probably want to spend the rest of your life trying to get that feeling back. Although it is easy to find stocks that have been rising in the past, it is much more difficult to find stocks that continue to rise in the future.

In particular, watch out for stocks that remind you of making money a long time ago, because it may be a coincidence that they have similarities with the stock you made before. Only after carefully studying the basic business behind a stock can you invest a lot of money to buy, even if the stock market is off for five years, you are happy to hold it.

• Lock up your emergency money and throw away the key

If you can't stop yourself from taking risks in the market, at least limit the level of risk. Just as a gambler locks his wallet in a hotel safe and brings only $200 to the casino to limit his potential losses, you should set an upper limit for speculative trading. Put at least 90% of your money into low-cost, diversified index funds that cover all types of stocks in the market.

The proportion of speculative transactions is up to 10%. Make sure your "emergency money" is completely separated from your long-term investments and never get mixed up. No matter how much it goes up or down, never raise your bets on speculative accounts. (it is especially important to resist the temptation to raise the stakes when your trading is doing well. (if the speculative account loses money, close it.

• Can withstand the temptation of a hint

The dog in Pavlov's experiment drooled as soon as the bell rang, and the alcoholic longed for a drink as soon as the beer was poured into a glass at the other end of the room, and the stock market kept sending signals to tempt you to enter. Howard Rachlin, a psychologist at the State University of New York at Stony Brook, points out that the best first step to quitting smoking is to try to smoke the same number of cigarettes every day, which gives us a clue: the less insatiable the chance of greed and the less satisfaction you expect, the more self-control you will have.

Brian Knudsen advises: ask yourself, how can you clean up your environment? Think of a man who tried to quit smoking. He hid all the ashtrays. (how can I expose myself to fewer cues? Try to turn off the financial channel on TV so that there won't be any noise about the stock market to distract you from your long-term financial goals.

Or, if you find yourself passing through a local stockbroker every day and can't help peeking at the stock market on your electronic monitor through the window, choose another path.

If you find yourself obsessed with checking stock prices online, you can use the history window on your browser to calculate the number of times you query stock prices per day, which may shock you. The first step in reducing the number of queries is to know how often you query every day.

Another simple and effective way to control the temptation of cues is to make a list of criteria that must be met for each investment before you buy or sell a stock.

Berkshire Hathaway lists six acquisition criteria in its annual report, including those that chairman Warren Buffett and vice chairman Munger apply to any company they consider buying.

Make sure your list includes factors that you don't want to think about in depth, so you can quickly rule out bad ideas that might tempt you.

• Think twice before you do

In terms of investment at least, the "unthinking" advocated by Malcolm Gladwell can lead to disaster.

Instead, you need to look before you leap. "it's important to recognize that the total amount of risk-return is far more likely to drive your behavior than the small probability of getting a return," Knudsen said. If you realize this, you should say to yourself,'I should go away, play with my kids for an hour, and then think about it'. "

Financial decisions spurred by the prospect of huge gains are a bad idea.

Calm down, and if you don't have children to distract you, take a walk around the block or go to the gym, and then reconsider until your enthusiasm has passed and the expected circuit has cooled down before thinking.