Having managed money well during two recessions and September 11th, I know a thing or two about investing during moments of high tension. In fact, most of the returns I earned for my investors were during moments of such crisis. One crucial piece of advice that I can render in the face of events like COVID-19 is the distinction between fear and anxiety. By the way, a full fledged description of these differences is covered in my 2010 book, The Intuitive Investor.
Fear ≠ Anxiety
Most people use fear and anxiety interchangeably. This mistake emasculates a key insight about anxiety that helps investors to perform better in crisis. Let me explain.
According to experts of fear (yes, there is such a thing), such as Gavin DeBecker in his book, The Gift of Fear, and Lt. Col. David Grossman in his book, On Combat, fear is a moment of stark mental clarity that leads to action, or immediate reaction to a stimulus. By contrast, anxiety leads to confusion, muddled thinking, and inaction. Most of us have rarely, if ever, experienced actual fear of the kind described by these experts on the subject.
DeBecker begins his book with the story of a woman kidnapped by a serial killer who intends to kill her, and in a moment of pure fear/direct knowing/pure reaction she stealthily follows her would-be killer out of her bedroom as he goes to her kitchen to look for a knife with which to kill her. She follows him perfectly and silently out of her apartment, runs down a flight of stairs to a neighbor’s who then calls the police. Another example, coming from Grossman is that of soldiers in combat and police officers in shootouts who report their entire worlds slowing down to such an extent that they can see the rifling of bullets shot at them as they duck for cover. This is just one of many bizarre moments of clarity described by Grossman whose book was authored to illuminate the strange physiological effects experienced in combat.
This kind of instinctual reaction to real mortal danger (i.e. actual fear) is the true nature of System I thinking offered up by behavioral finance experts, such as Daniel Kahneman, and is to me a more perfect description of the actions of the amygdala. My own step-daughter, Kate, experienced the perfection of System I reacting in New Mexico when she was in our barn feeding our horses and encountered a rattlesnake. She immediately jumped up onto the very narrow lip of the half-door separating the horses from where their hay was stored. Kate does not remember how she got up there, just that she was up in the blink of an eye and perfectly balanced. If you think about your own experiences, perhaps in athletics, or in a car accident, or some other venue you may be able to remember a moment of this kind of perfect clarity which is, in fact, fear.
As an investor, if you ever encounter true fear you are likely to execute a trade order to either sell or buy in the face of crisis, all without intervening thoughts of any kind. I think you agree that few, if any, of us has ever done this. No, instead, most of us are paralyzed with anxiety in the face of crisis as investors.
In contrast to fear, anxiety is a different animal entirely. It is characterized by panic, rumination, muddled thinking, inaction, and other crippling behaviors. I think of anxiety as System I reacting desperately looking for expression – that is, action – but finding none, due to System II thinking and its endless quest for data and logic. When confronted with known unknowns we tend to be anxious and crippled intellectually. Said another way, I believe anxiety is the tug of war between System I reacting and System II thinking.
In The Intuitive Investor I describe the difference between a feeling and an emotion – two other terms frequently used interchangeably and mostly incorrectly. A feeling is a sensation coming from our senses, or from our intuition. Whereas, an emotion is our relating of that feeling/sensation to our knowledge, in search of an answer, and in service to judgment. When this is done, the clear signal delivered to us by our minds is turned into an emotion. In turn, this leads to bias. Which, in turn, this bias usually leads to less effective decision-making.
For example, it could be a day when the temperature is 0-degrees Celsius, about to snow, windy, and overcast, and a friend has asked us to go for a walk. These are the facts of a situation. Isn’t entirely possible that one person interprets this set of facts as “bad” and decides to stay in because of the “dreary, cold, damp, day?” Whereas, isn’t it also possible another person interprets this set of facts as “good” because they can go for a brisk walk that makes them feel alive, connection to their friend, and where they are unlikely to encounter other people? In both situations each of the people described has turned feelings/sensations/facts into emotions. Ideally, though, the facts of the situation are contemplated with consciousness to lead to a better decision.
Key point: turning sensations into emotions is not a bad thing as long as it is a conscious thing!
Why It Matters
Anxiety has exactly the qualities of turning facts and sensations into indecision, muddled thinking, bewilderment, and so on. These are the symptoms of anxiety, and are to be avoided. This is because I can assure you that access to your full potential emotional, intellectual, and inspirational firepower is nigh impossible in a state of anxiety.
If you find yourself contemplating an investment decision, see if you can slow down your mental apparatus long enough to recognize the symptoms of anxiety present. [Technically, this is called metacognition.] If you are anxious, then you know that you need to engage in some sort of calming practice to restore the quality of your thinking. Said another way, if you feel confused, muddled, and indecisive then STOP thinking.
What to Do to Switch Anxiety Off
Here are some things scientifically demonstrated to help turn off your anxiety:
- -doing something artistic
- -talking with someone about your emotions out loud
- -the “honey-do” list of chores and repairs
In the midst of COVID-19 and its global anxiety orgy there is a huge opportunity for you to grow your capabilities as a person and as an investor. Who knows, you may even end up improving your alpha-generation powers, too.
Let’s be conscious out there!