The Market Wrap 25-5-12

Time to start working with your Cerebrum Frontal Lobe.

By Jason Fittler

The market is back at the bottom of the trading range. This is the fifth time in the past 12 months, each time it bounced back.

Is it different this time?

To answer that question we need to take a look at how we humans process stimulus. Our Brain is broken into four main sections, the Cerebrum, Cerebellum, Limbic System and Brain Stem. It is our Limbic System which is causing you stress about the current market and news flow.

Our Limbic System is broken into four parts the Thalamus, Hypothalamus, Amygdala and Hippocampus. The Amygdala is located in the temporal lobe and looks after things such as memory, emotion, and fear. It is this part of our Brain which protects us from harm, for example if you burn yourself with hot water this part of the Brain remembers the pain so that next time you are more careful with the hot water.

It is your Limbic system which is telling you to panic in this market, to sell out and run for safety. Recommending to buy while the market is in free fall does not compute with the Limbic System as the Limbic System is emotions based.

At the same time your Cerebrum Frontal Lobe which is the part of your brain which deals with reasoning, planning and problem solving and is telling you that this is a good opportunity to buy quality companies and to take advantage of the situation.

The Cerebrum Frontal Lobe is the part of your brain which controls common sense. Is Woolworths going to go broke because of elections in Greece? The answer is No; therefore if the price of Woolworths has come back due to panic selling on the market then it is a good time to buy. The same is true for all large blue chip companies in the Australian Market.

With the GFC only three years ago you will be forgiven for your Limbic System working overtime. However to make money moving forward I recommend that you start working with your Cerebrum Frontal Lobe.

Back to the question…“Is it different this time?” No, I expect that we will continue to see weakness in the market over the coming months but medium term we will see the market move back towards fair value of 4700 in due course.

In the meantime sit back and watch the dividends flow in. Now is a time to be buying quality companies, feel free to hedge your bets and buy in stages.