Invest Better by Outsmarting Your Brain

I wouldn't wish brain damage on anyone, including myself. But I recently read about an interesting study from the folks at DALBAR that demonstrated how people who are unable to feel emotions due to brain lesions were able to make better financial decisions than the rest of us.

The researchers set up a simple experiment. Participants were given $20 to play a 20-round game. In each round, they could wager $1 on a coin toss. If it went their way, they'd get $2.50. If it didn't, they'd lose their $1. From a logical, mathematical perspective, the smart thing to do is take the bet each time. But most participants hesitated now and then, afraid of losing money. This fear was likely heightened after a few successive wins, as the odds of losing on the next round would seem (incorrectly) to be greater. (Each round offered the same 50-50 chance of victory.)

The study included a group of participants with brain lesions. Because their decisions weren't affected by emotions, this group performed much better, scoring an average of $25.70 versus $22.80 for the control group.

This reminds us to try to keep our emotions in check. After all, fear and greed are always at play in the market, and we can use them to our advantage or disadvantage. As Warren Buffett has quipped, it's best to be fearful when others are greedy and greedy when others are fearful -- yet too often we simply join the crowd.

One way to go about investing is to follow the value approach, which often entails seeking out companies others have abandoned or lost hope in, firms that many investors are afraid of. That's what the analysts at our Motley Fool Inside Value newsletter do, seeking undervalued and often unloved companies. (Try the newsletter free for 30 days and you'll have full access to all past issues.)

You can also simply screen for beaten-down companies. A simple screen for companies with attractive growth rates and cheap price-to-earnings and price-to-sales ratios came up with the following stocks, among others:

• Toyota Motor (NYSE: TM)
• Barclays (NYSE: BCS)
• Sony (NYSE: SNE)
• Seagate Technology (NYSE: STX)
• LG Phillips (NYSE: LPL)
• Ingersoll-Rand (NYSE: IR)
• Cummins (NYSE: CMI)

Of course, a screen is just the first step to find stocks worth looking at. You'll want to do additional research on your leads before investing.