The Only Thing We Have To Fear
Thursday, January 29, 2009 | Bob De Dea
Fear of missing the next winner is a killer.
The quote above is from a recent article by one of my all-time favorite financial gurus, our own Chris Rowe. It got me thinking about how fear often rules our financial futures and even our lives.
It’s fear that we won’t be successful or good enough at something that keeps us from trying new things. We all have our arrived-at level of comfort and that’s not necessarily a bad thing – it’s not unreasonable for us to think twice before parachuting out of an airplane or eating raw shellfish from an unknown source or using margin to buy an Ultrashort ETF. Fear is meant to be a psychological inhibitor that keeps us from destructive actions or from potential (or perceived) threats.
We all know the instinctual fear response: the uncomfortable surge of apprehension, the gripping manifestation of panic in our breathing and in the fibers of our being (literally, as the emotion causes adrenaline in the blood to flow to the muscles with fresh oxygen and minerals, in anticipation of a physical reaction to a threat). Such self-preservation is fear’s most basic form.
And we all understand the psychological form of fear: the desire to avoid pain that we’ve experienced in the past. This one is common among investors and is the type referred to by Chris in the above quote.
“I missed out before. If I don’t buy now, I could miss making the big bucks.”
“I got burned by following that guy’s recommendation. I’ll never listen to him again.”
Notice that the thing about this form of fear is that it’s designed to keep us from again encountering the cause of the pain.
Fear is not logical. It doesn’t consider the big picture. One bad trade on a guy’s recommendation and the guy is an idiot, notwithstanding his generally successful track record. Here’s where fear can backfire. Remember how I said it’s a reaction to a perceived threat? In the days of our early ancestors, if you ran away from a movement in the underbrush because you were afraid it might be a lion, this was a good thing. You had nothing to lose if you were wrong, and everything to gain if you were right, since it was a matter of survival. As Frank Tallis, in his book Hidden Minds, writes:
The reason why evolution has equipped the brain with a swift (although not necessarily accurate) processing system is quite straightforward. In the ancestral environment, predators struck quickly. Therefore, it was well worth responding to any potential threat – even if the majority of responses proved to be unnecessary. The cost of failing to respond (or responding slowly after careful, conscious, consideration) was probably death. On the other hand, there were no costs attached to being jittery. In the ancestral environment, it didn’t pay to be cool.
Such distinctions are more difficult to draw in the modern world where, when fear kicks in, we still resort to either escape (getting out of the market before you lose it all) or confrontation (blaming Wall Street or the government or anyone and everyone for making this mess, or at least for allowing it to happen). We are still slaves to that adrenaline rush.
Unfortunately, fear sometimes keeps us from being smart.
And there's another face to fear: The attack of uncertainty and anxiety that occurs when we don’t have enough information to make a reasoned decision. We don't have to look hard at the current market to be overcome by this kind of fear. If this leads us to seek out more knowledge in an effort to make sense of what we’re experiencing, or if it keeps us in cash because of the unfathomable volatility on Wall Street – great! But it can also cause us to make irrational and not-well-thought-out moves in a market that will not hesitate to rip our faces off.
What does that mean to me as an investor? Well, sometimes the perceived threat is imaginary (“The market will never recover!”). For our ancestors, it didn’t matter how many times they were wrong about there being a lion in the brush; it was always a good idea to run. For the modern investor, it’s important to sort the wheat of truth from the chaff of imagination.
The cause of the pain in the earlier examples, it could be argued, was not missing the timing or listening to the guy with his recommendation – it was a combination of our own desire to win (our belief that we would make big money) and the slap in the face that lets us know we really can’t control outcomes. In other words, it was our expectation being thwarted. We would, after all, experience the same unpleasant feeling if we picked a loser on our own. Predicting the market is like trying to sculpt with mercury. The most we can hope for is understanding what’s going on right now.
The key to conquering fear is knowledge. That’s why we here at Tycoon spend so much time and energy writing articles and equipping you with an arsenal of information, facts, ideas, and principles to guide you in your investing life.
It's a new year. Whether or not you're the type to make resolutions, I would encourage you to consider taking the next step and going the distance yourself. To take control of your own financial future, study one of the educational courses offered by Tycoon: Teeka’s ETF Master Trader program or Chris’ Internal Strength System. You’ll be taught by professionals how to master fear, so that next time you feel your heartbeat racing and you’re almost incapacitated by terror, you’ll have the weapons and the tools to gain the upper hand.
Do not look back in anger, or forward in fear, but around in awareness. – James Thurber
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Bob De Dea
Chief Investment Officer
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