Collective fear stimulates herd instinct, and tends to produce ferocity toward those who are not regarded as members of the herd…Bertrand Russell
Our ancestors lived in a constant state of fear– their lives in constant jeopardy from the elements, wild animals or climate changes that threatened to kill them. In the modern age, we know that some dangers are still very real. If you are walking across the street and a large bus careening out of control comes bolting toward you at high speed — you are in real fear. In this case, the bus is the predator, and you are the prey. Death is literally staring you in the face, and your body goes into fight or flight mode as it tries to avoid it. This is real, tangible fear, and many of you have faced situations where bodily harm or death was literally staring you in the face.
In the markets, the fear predators are what force us to take action. Fear is the hunter, and we are the prey. We want to make money, and the predator that pushes us to do that is greed. Markets move up because people are buying and down because people are selling. We do not know the motives of these millions of people, but we infer that they are acting in their best interests to make money or minimize losses. Thus, buying or selling begets more buying or selling as the herd reacts to the predators of fear and greed.
To experience fear is human. With the exception of individuals who have certain brain lesions or are highly medicated with potent psychotropic medications, everyone alive feels fear. It is the emotion that binds us together, and it is the emotion that the media, public relations and advertising use to drive powerful messages directly into our limbic brains.
Paranoia strikes deep
Into your life it will creep
It starts when you’re always afraid
You step out of line, the man come and take you away…
“For What It’s Worth” by Buffalo Springfield
The major fears of traders are based on one simple premise: We do not like to be wrong! We don’t want to make a mistake–and having made one, we don’t want to admit it. At some point, the pain of realizing that we have made a mistake is too great to bear, and we get rid of our position at any cost. This is why short squeeze rallies (shorts buying at any cost just to get out so that they don’t have to take the pain that literally feels like their insides are being squeezed) are so powerful. This is why long squeeze declines (longs selling out at any cost just to get out so that they no longer have to tolerate the pain of descent into complete despair) are equally breathtaking.
The four major fears of traders and investors: fear of losing, fear of missing out, fear of leaving money on the table and fear of being wrong–are really some combination of fear and greed. The bottom line here is that fear is the predator. It chases after us, it hunts us down, it makes us captive to it and it causes us to act in ways that are not necessarily in the best interest of our equity curve. The fear of dying from a bus coming at you full force is very real. The fear of dying from selling a losing position or from leaving money on the table is quite different. The former is a rational fear of a real danger that is stalking us. The latter is not entirely rational, yet we allow it to stalk us.
The best thing we can do with less-than-rational fears is to turn them around completely. In other words, rather than letting fear be the predator and stalk you, adopt another attitude of action. Do not be paralyzed and frozen by fear. Become the predator and stalk it. Face it full on. Look at it and ask yourself if it’s really all that frightening. As long as you continue to allow yourself to be stalked by fear, your world will shrink, and you will become smaller and smaller as you retreat into a space of trying to protect yourself. Fear has you exactly where it wants you.
If, instead, you begin to move in the direction of your fears–slowly and steadily–you will find that they have less and less power over you. Your world begins to expand. You understand that fear is really False Evidence Appearing Real (F.E.A.R.). You begin to see that you have the power within you to face these fears and to control them. They are real only if you allow them to be real. By using the tools of position-sizing and money management, you control your risk as you move closer and closer to that fear. Once you are able to keep moving toward it, fear begins to diminish and you see it for what it really is, rather than what you imagined it to be.
You gain strength, courage, and confidence by every experience in which you really stop to look fear in the face. You must do the thing which you think you cannot do…Eleanor Roosevelt.
By Janice Dorn, M.D., Ph.D.