COPING WITH THE DOWNTURN AND PREPARING
FOR RECOVERY
Dr. Richard
Geist
The past
17 months have been a humbling experience for
most investors. Paper losses, according to some
estimates, have exceeded $4.2 trillion dollars,
and the record ten-year economic expansion is
threatened with recession. The Nasdaq plummeted
nearly 65% from its high and many technology
stocks have retreated 80%- 90% from their 2000
highs. Because of the speed and intensity of
monetary loss, the current financial devastation
is comparable to the crash of 1929—although we
expect the recovery to be swifter and more
rewarding. In this context I’ve received
many calls from journalists wanting to
know—beyond monetary loss--what all this means
for our collective psychological state. So it
seemed appropriate to try to put into words what
I’ve learned through many conversations with
distraught investors over the past
year.
The Investor’s
Relationship with Mr. Market
Assuming
we’ve done our research, before committing money
to a stock we delve into a company’s management,
products and services, financials, technical
trading patterns, and analyst reports. For many
investors the results of this research produce
“objective” data that help determine buy/sell
decisions. What’s often forgotten is that every
investment in the market is also accompanied by
fantasies (conscious or unconscious) that embody
our deepest experiences of being in the world.
Some of these fantasies relate to the ostensibly
objective data we’ve collected. For example, we
may believe that some new technology will change
the way our culture does business; we may
believe that a CEO is the smartest manager we’ve
ever met, someone capable of leading his or her
company to tremendous market share in its
industry; we may believe that, as a result of
our financial analysis, we’ve brilliantly
discovered an undervalued investment that the
world has yet to hear about.
Other
fantasies relate to how we use the market to
sustain our sense of self (our self esteem,
confidence, vitality, security, initiative, and
wholeness). Years of psychological research have
proven that just as we all need oxygen to
sustain our physical selves, we are “hard wired”
to need and seek out attachments and experiences
that provide the psychological ingredients that
maintain and fosters the growth of our sense of
self. In most instances these attachments
involve relationships with other people, but it
is also clear that the non- human
environment—institutions, ideas, books, nature,
music—can serve the same function. Think, for
example, of how a walk in the woods or listening
to music can provide calmness and soothing when
we are upset, or how being associated with a
well-known institution can make us feel more
confident and important. Guess what? Investing
in the stock market is often used to provide
those same psychological ingredients we need for
growth.
Think of
the times you buy a stock and it immediately
appreciates in value. Even if the increase in
stock price has nothing to do with the reasons
you bought the stock, you feel smart and
competent. Everyone who invested in the dot.coms
previous to March 2000 felt like a brilliant
investor—someone to be admired and applauded for
his or her stock picking savvy. Those who
believed in Henry Blodgett or Mary Meeker and
were guided by their analysis of some of the
Internet Stocks felt bolstered and uplifted by
the imagined connection with these gurus.
Concretely, the feeling was “you’re great, you
understand these new economy stocks, and I
follow you, so I’m great too.” Those
investors who decided fundamental analysis was
passé and joined together to trade stocks
according to candlesticks, oscillators,
resistance and support levels, and other complex
technical formulas felt like kindred spirits in
step with each other, enhanced because they
shared the same philosophical approach to
investing. What is important here is that
the process of investing has the potential to
perform a psychological (internal) function that
helps to sustain, expand, and enhance our sense
of self. These functions are different for
everyone because they are subjectively perceived
rather than being real. Mr. Market could care
less whether your stock goes up or down. It is
the fantasies you create around your own
investing decisions that serve as the sustaining
functions.
Your Sense of Self in a
Down Market
When the
market crashes, turns bearish, or severely
corrects, we not only lose objective things such
as money. We also lose the sustaining functions
of which the investing process (and or money,
which may psychologically represent self esteem,
independence, power, etc.) has been the source.
That means, in addition to objectively not
having the money to buy that new house or car,
our self-esteem drops, our capacity to calm
ourselves down is diminished, our motivation
wanes, our confidence is shaken, and our
vitality ebbs. I am reminded here of the patient
who, when asked about his complaints, tells his
internist, “My stomach, hurts, my head aches, my
body feels cold, and you know, doc, I don’t feel
so well myself.” A down market represents
an injury to our total sense of self and all the
functions that sustain it. In a general way it
represents a hope or fantasy
lost.
In
response to this injury we institute emergency
measures to compensate for the lost sustaining
functions. For example, where we feel
anxious and lose the capacity to calm ourselves
down, we might frantically seek out others to
serve that function. We repeatedly call brokers,
company management, other investors, or pursue
scattered rumors on stock message boards. We may
turn to books or articles for reassurance.
During bear markets, for example, sales of
Graham and Dodd’s Security Analysis typically go
up significantly. It becomes much easier to
understand why some investors believe rumors on
a stock message board if we understand the
self-sustaining functions being served by
seeking out information there.
If the
bear market causes us to lose a self-image that
was affirming, e.g. “I am a smart investor,”
then we may lose the capacity to feel good about
ourselves. Our vitality may ebb and we
feel depleted and empty. To compensate we may
seek out stimulating activities to overcome the
deadness that has set in. We might trade too
often in an attempt to make up for losses, some
may use drugs or alcohol as a stimulant, others
may engage in dangerous, high-risk activities.
Still others use sexual activities as a
stimulant. But no matter what the idiosyncratic
response, the important thing to remember is
that our behavior in the wake of a down market
is less determined by the external loss and more
determined by its impact on our
self-experience.
Depending on the
strength of our sense of self, down markets will
affect us differently. Think for example of two
people whose boss criticizes them at work. One
is able to allow the criticism to bounce off her
with the realization that the boss is having a
bad day; the other allows the criticism to eat
away at her for the whole day, feeling
immobilized and unable to accomplish any
meaningful work. How solidly we have
internalized our self- sustaining functions will
determine our reactions. When less has been
internalized, we will need more external
compensation.
It is in
our attempts to compensate for the loss of
self-sustaining functions that most investing
mistakes occur. That’s why well-known investors
like Barton Biggs have commented “…the
mature, diligent, intelligent investment manger
enhances his potential for better investment
performance only through greater
self-understanding.” Too many times in down
markets we try to solve our dilemmas by solving
the wrong problem because we address it on a
behavioral (external) level rather than a
psychological (internal) one. To solve investing
problems we need to address them by
understanding the subjective experience of the
investor. Consider the following
example.
John
repeatedly bought stocks that were recommended
to him by some well-known money managers that he
knew. In each case after he invested, the stock
plummeted (which may have been more of a market
phenomenon than a fundamental problem with the
companies). But John was consulting me because
he wondered why he kept making the same mistake
over and over again. He knew that he shouldn’t
invest on rumor and that he shouldn’t buy on
some one’s recommendation without doing his own
research. But the pattern continued despite this
knowledge.
Dealing
with rules such as don’t buy on tips and rumors,
or don’t buy unless you research a stock
yourself is approaching the problem on a
behavioral level. It doesn’t address John’s
subjective experience in buying these stocks.
When I asked John what came to his mind when he
thought about buying his friend’s
recommendations, he replied, “These guys are
pros, they know what they’re doing, and they
don’t go around telling everyone what they’re
buying.” So it quickly became clear that
John experienced these tips to mean the money
managers’ felt he was special. John was having
difficulty regulating his self esteem as an
investor in the absence of others thinking he
was a unique and special person. When he bought
their recommendations, he was enhancing his
self-esteem at the cost of losing money.
Unconsciously the importance of the
self-sustaining function being offered by these
“special” recommendations was more important
than whether the recommendation was a money
making one. In an up market, these stocks
probably would have been appreciating in value
and John would have felt both special and like a
brilliant investor. In a down market, however,
it becomes extremely important to understand how
psychology affects investment decision-making
because the addiction like pursuit of
self-enhancing functions becomes decoupled from
sound investing.
Getting Back on
Track
Great
investing cannot occur in the absence of our
understanding the nature of company
fundamentals, management, products, services,
and technical patterns, as well as the
historical and contemporary context of the
economic environment. But all of this
becomes meaningless unless we can use
self-understanding to keep emotions from
ravaging our actual investment decisions. The
only way to accomplish this is to shift our
attention from the behavioral level to
understanding how we subjectively experience our
selves. Ask yourself the following
questions to help with the
self-analysis.
1) What
comes to my mind when the market is going
against me?
Here we
are looking for the impact of the external
situation (the down market) on our self
experience and the accompanying self-sustaining
functions. In other words, what is the internal
loss? Are we losing our ability to regulate our
self-esteem in the absence of the market’s
confirming validation? (e.g. I feel stupid, how
did I make so many mistakes, I knew I should
have sold earlier”). Are we losing our internal
belief in a looked up to other? (e.g. “I knew I
shouldn’t have trusted that analyst’). Are we
losing a role that was affirming? (“I can no
longer be a good provider for my family”).
Knowing what self- sustaining function is being
affected leads to the next
question.
2) What
have I done in the past to restore myself when
this has happened?
Here we
are searching for similar feelings in the past
in an attempt to discover strengths that may be
available to right ourselves. For example, once
John discovered that it was his needed
attachment to others who thought he was special
that led to repeatedly buying his stocks, he was
able to think about other ways he was special—he
was a good father, well respected at work,
thought of as special by his clients. Once he
allowed these other areas to become more
recognized, he no longer needed his “gurus” to
confirm his specialness. He realized that in the
past when he felt unrecognized, he would think
about his day at work and remind himself of some
of the appreciative things his clients had said
to him.
3)
Despite my mistakes, what have I done right in
this market?
Here we
are searching for pockets of strength which can
be used going forward. For example, Laura spent
many months researching a company before she
made a large investment in the stock. After
waiting several years, the stock increased
nearly 2000%, but she failed to sell before the
market crashed around her, thus losing much of
her gains. She became extremely self critical,
which made her hesitant to make any investments.
But when she focused on what she had done right
in the market, she realized that she had done a
superb job of researching and being correct
about the company she invested in. The company
performed exactly as she predicted it would.
Even though she failed to sell at the correct
time, the realization that she had performed
superior research restored her confidence in
making the next investment. In addition it
allowed her to examine her mistake (she had
allowed her sense of competence to become too
grandiose and thus ignored warning signals from
the market) so as not to make the same mistake
again.
4) What
kind of cognitive planning can I do
now?
Cognitive
planning allows us to decenter from our emotions
and put our intellectual capacities to work in
the service of recovering from what has been a
psychological injury. Rather than being frozen
in a bear market or retreating to an “I don’t
care anymore” mode until the market recovers, we
can begin to examine ways to get back in the
game. What should we be selling to be prepared
for the next upturn? How much cash should be on
hand for new buying? What industries will lead
the next recovery? Which stocks in those
industries should I be prepared to buy, and at
what price? What new choices do I have to
play this down market that I haven’t thought
about before? Such personal questioning
revives our lost confidence and generates new
motivation to re-engage in the
market.
By
continually attempting to understand the
personal ramifications of external market
events, we can free up unknown strengths and put
them to work in re-entering the
market.
© Richard
Geist, August 2001
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