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There’s a French expression for twilight: l’heure entre chien et loup.

The hour between dog and wolf.

It describes the moment at dusk when the light fails and you can no longer tell if the shape moving toward you is a familiar dog or a dangerous wolf.

Friend or threat. Safe or fatal.

Former Wall Street trader turned Cambridge neuroscientist John Coates borrowed the phrase as the title of one of the most interesting books I’ve ever read on investing.

And here’s why it matters: most investors think their biggest enemy is the market. It isn’t.

It’s their own biology…

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The Body Trades Before the Mind

Coates spent years measuring the hormones of traders on a London trading floor. Cortisol in the morning. Testosterone before lunch. Cortisol again after the close.

What he discovered should change how every investor thinks about risk:

Decisions we believe are rational and considered are, in fact, downstream of physiological states we never even notice.

By the time the conscious mind weighs an investment, the body has already reacted. Heart rate has shifted. Hormones have surged. Risk appetite has been set.

Coates puts it bluntly:

“Risk is not just an idea. It is a bodily sensation.”

Investing, in other words, is not purely an intellectual exercise. It’s a physiological one.

And the markets pay people who don’t realise this.

The Winner Effect: Why Bull Markets Make Us Stupid

Coates’ most provocative finding involves a phenomenon he calls the winner effect.

When a trader wins, testosterone rises. With elevated testosterone comes greater confidence, greater appetite for risk, and a willingness to take on larger positions.

Win again, and testosterone climbs higher. Risk appetite expands further.

It is, on paper, a useful adaptation - confidence backed by results. But in markets, this feedback loop becomes a trap.

The trader who has been right ten times in a row is not ten times smarter than the trader who has been right five times.

They are, however, biochemically primed to take on dramatically more risk.

This is how bull markets end. Not with a sudden change of mind, but with a gradual chemical drift toward overconfidence among the people moving capital.

As Howard Marks has noted:

“The greatest risk doesn’t come from low quality or high volatility. It comes from paying prices that are too high.”

And we pay prices that are too high precisely when we feel most certain. Which is precisely when our biology is least trustworthy.

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The Cortisol Crash: Why Drawdowns Cripple Judgment

If testosterone is the hormone of bull markets, cortisol is the hormone of bear markets.

Cortisol is released in response to stress and uncertainty. In small doses, it sharpens us. In large or sustained doses, it does something far worse:

It rewires the brain to avoid risk at almost any cost.

Coates documented that cortisol levels in traders rose by over 68% during periods of market volatility.

Sustained at those levels, cortisol impairs memory, narrows attention, and triggers a learned helplessness that turns thoughtful investors into panicked sellers.

This is why drawdowns feel different when you’re in them.

The same investor who confidently bought a business at 50 pounds cannot bring themselves to buy more at 30 pounds - not because the thesis has changed, but because their body has changed.

The opportunity is right there. The biology is in the way.

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Why Markets Bubble and Crash

Put these two hormones together and you have an explanation for market cycles that no behavioural finance textbook can match.

Bull markets are not just stories about earnings or innovation.

They are also, at the level of the people involved, stories about collectively rising testosterone - confidence breeding confidence, risk appetite breeding more risk appetite, until the people deploying capital are biochemically incapable of restraint.

Crashes are not just stories about debt or fraud.

They are stories about collectively rising cortisol - fear breeding fear, paralysis breeding paralysis, until the people who should be buying are biochemically incapable of acting.

This is why the same patterns repeat in every cycle, with different protagonists and different technologies. The hormones don’t change. The humans don’t change.

Charlie Munger captured the essence of it:

“The world is full of foolish gamblers, and they will not do as well as the patient investor.”

The patient investor wins because they have done the harder work - they have learned to act despite their biology, not because of it.

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What This Means for How We Invest

Coates’ work is not academic curiosity. It has direct, practical implications for how serious investors should structure their process.

Five lessons stand out:

Treat winning streaks as warning signs, not vindication. The longer you’ve been right, the more your biology is working against you. Recheck your assumptions hardest when you feel most certain.
Build your process for the worst version of yourself. Write your investment theses down when you are calm. Make your buying decisions in advance of drawdowns, not during them. The you that is stressed cannot be trusted to do the work of the you that is rested.
Respect physical state. Sleep, exercise, and time away from screens are not luxuries. They are inputs to your decision quality. A tired investor is a different investor.
Use checklists. Checklists impose process when biology wants to improvise. Every great investor I’ve studied - from Buffett to Klarman to Marks - relies on some form of pre-commitment to overrule in-the-moment instinct.
Lengthen your time horizon. The longer you hold, the less the daily hormonal weather matters. Compounding rewards those who can wait. Biology punishes those who can’t.

The Takeaway

If you remember one thing from this post, make it this:

Your biggest enemy as an investor isn’t the market. It’s the body that’s reading the market. Every bull market top and every panic bottom is, at the level of the people involved, a hormonal event before it is a financial one.

That’s the central lesson of The Hour Between Dog and Wolf. And it connects directly to how we invest at Schwar Capital.

We treat winning streaks as warning signs, not vindication. We write our theses down when we are calm, so the stressed version of us has something to follow. We use checklists to overrule instinct. We size and pace our positions for a long horizon, so the daily hormonal weather doesn’t run our portfolio.

The market doesn’t reward the people with the highest IQ. It rewards the people who can keep behaving rationally when their biology is begging them not to - and who have built a process that holds when their willpower won’t.

That’s how the edge survives. And over time, the edge compounds.

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Thanks for reading,

Dom
Schwar Capital

Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions. You can see our full disclaimer here.

The Biology of Bad Decisions