Water is one essence: drunk by a cow it becomes milk, drunk by a snake it becomes poison. -- Zen koan Dr. Hendlin, I've been following your excellent articles for some time. Can you explain something regarding human behavior? Are we conditioned to be negative and then have to reprogram ourselves to be positive? I ask this only because I have noticed that negative and ominous news appears to have more of an impact on people than positive news. This obviously has ramifications for trading. -- AMSShrink Rap: In answering, first I want to use a wide-angle lens to discuss negativity and where it comes from. Then I'll zoom in and provide some tips on how to cope with doom and gloom when trading. First, let me point out that there is nothing in our mental development that necessarily makes us more negative than positive in our thinking about ourselves or our possibilities for the future. Nor is there any social conditioning that necessarily favors negativity in our view of others and the world. There are, however, individual differences in the coping styles of children that may push them toward a pervasive negativity about themselves and their chances in life. As adults, unrelenting negativity accompanies what is called learned helplessness, or the resignation that results from seeing that one's repeated efforts to effect change in one's life are ineffective. Less severely, a persistent negativity in one's attitude and worldview definitely will affect one's projections about the future, including views on the direction of the market. This is why I've previously suggested trying to decipher a commentator's worldview when listening to his or her market analysis.
Critical Thinking and "Spin"
It's important, though, to distinguish between negativity and the development of good, critical thinking. To question media news interpretations, as well as the solutions offered to us by experts, is sensible, prudent and a sign of mental maturity and independent thinking. Our use of critical thinking does not have to make us negative in outlook. It is simply a high-level cognitive skill developed to help reality-test the world around us. In particular, the notion of "spin," or interpretation of events to fit one's motives, is taken as a given in personal relationships, advertising, "damage control" in the corporate world, the equity markets and the news media. We learn through experience that we must have a skeptical and questioning attitude toward whatever spin is presented to us, or we risk receiving only a partial and biased picture.
Negotiating Negative News and Market Instability
But if you find yourself being overly pessimistic as a result of the media's emphasis on negative news, here are some ways to balance your thinking as it applies to your trading:
Use your "mute" button liberally. Take a hiatus from reading or listening to the same stories over and over again. Know what your tolerance is before the negativity becomes too depressing and unduly affects your trading decisions.
Guard against compulsively being sucked in by the intrigue. You don't need to know every detail of hot news stories. Not only will you maintain a better perspective and sleep better, but your trading will not suffer if you refuse to know or care about every excruciating, sleazy development of "The Ongoing Saga of the Rich and Powerful."
Neutralize the negative by consciously seeking out positive news on a different topic. It is too easy to see things only from the negative side when this is primarily what we allow ourselves to be bombarded with.
Be cautious in trading on negative news. Often the full impact of negativity is not felt in a stock until the full story is revealed. Don't fool yourself into believing that "all the bad news is already built into the price." This is a delusion that leads to calamity, as you can't possibly know how investors will continue to punish a stock for a bad story that turns worse.
When the market is telling you to be careful and get out of the way, don't try to be a hero. Only the most nimble of traders have any business coming into the market when a wholesale slaughter is taking place and "Enronitis" is spreading faster than the flu. You will only know the worst has occurred when the market calms down for a period of weeks. In the meantime, pay attention to the message and get out of the way.
If you are not comfortable going short, keep your powder dry by holding a lot of cash. This is something that almost no one emphasizes enough. Stay in touch with your fear so that any greedy thoughts of jumping in and swimming against the tide are contained. Don't be persuaded by anyone to commit money to a market that is too unstable and far too risky.
Last but not least, don't fall prey to the recency effect. Studies show that people tend to best remember and bias their present attitude toward what has happened most recently in their lives. If what is most recent for us is fear, insecurity and negativity about the future, what the media focus on will be a reflection of this. This, of course, will also influence our market sentiment and trading behavior. Awareness of this recency effect allows us to make conscious allowance for it in our thinking and outlook.