Capital Markets Recap – Time to Fear

No, no, no, that’s not what I mean. I wanted to take a moment to highlight why what one should fear is fear. One of the best books I’ve read in the last couple of years is, Inside the Investor’s Brain; The Power of Mind Over Money, by Richard Peterson, M.D. He also writes a blog and I thought I would share with you his posting of this morning. The underlining is mine. You can read more at his, but here are the highlights of his most recent posting. In his book he goes into the physiological aspect of emotions, and this posting is no different. (In case this e-mail doesn’t come across as well at your end, I’m enclosing the excerpt in asterisks.

In the financial markets, you rely on your mind as much as Michael Phelps relies on his arms. Every decision you make has financial consequences, and it’s essential to be as clear as possible.

Fear causes the secretion of Cortisol – a stress hormone that causes hypervigilance (can’t sleep), jumpiness, intensity, and focus in the short term. In the long term, if you’ve been stewing in your own Cortisol for a few days, it starts to wear down your immune system, impair your short term memory and judgment, and make you hyperalert to threats (and unaware of potential opportunities). A few pointers follow. Also see our blog, which has much more detail:

1. Identify how you respond to fear, and become aware of how it is affecting you and your behavior. Are you more irritable with your family? Are you having trouble sleeping? Use these signs to clue you in on when your fear level is rising, and then take action.

2. Fear is an anticipatpory emotion. It’s about the future, not the present. If you want to get out of your fear, then look at where you are right now, not where you’ve been or where you are afraid you are going. Get centered in this moment, right now.

3. Think about the big picture. You are going to be OK. You are still going to grow older, you are still going to retire someday, your children will grow and have their own lives. If you are spiritual, then take time to feel the great mystery of life, to feel love, to appreciate beauty.

4. Take care of yourself FIRST. You are useless if you are feeling miserable and freaked out. Do what works for you – excercise, good diet (less caffeine), yoga, meditation, prayer.

5. Fear lingers until it is discharged. If you don’t take action to deal with your fear, then it will get to you. Do something – excercise, sell a small painful position – do whatever it takes so you can think clearly again.

6. Consider selling all or part of a painful position. Sometimes we just can’t think clearly and prepare for opportunity if we’re focused on resentments and anger about prior stock duds.

At times like these, it’s important to remember what the great investors of history have said. You’ve heard Warren Buffett’s saws about being greedy when others are fearful. There are lots more. In his most recent dispatch, Bill Gross of PIMCO, aka The Bond King, included the following line (thanks to my colleague Mark Etter for pointing it out): “It is prudent at the moment to fear McFear itself.” If you’re tempted to dismiss the wisdom of the ages, that’s a great sign, as I suspect you aren’t the only one. The market will be at a bottom when no bottom (or hope) is in sight, all accumulated wisdom is ignored, and this-time-it’s-different and pair-a-dimes abound.

While it’s easy to give the advise that Congress needs (don’t just do something; sit there), by all means do something. Heed points 1 – 6 above. Sell stuff down to the sleep level. But don’t forget that the long term–that goal toward which your objectives should be focused–is longer than today, October, and this year or next.

Investment Management Services Tower Private Advisors

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