Master your fears when the universe goes awry
By Elizabeth Bailey
Financial Times; Aug 10, 2002
It was Tom Wolfe in Bonfire of the Vanitieswho applied the term "Master of the Universe" to a player in the financial markets. Sherman McCoy, bond trader extraordinaire, was a tragicomic composite of hubris born of a market boom.
Today, with the stock market index following more the trajectory of a roller coaster than a guided missile, few, if any, traders or investors feel much of a sense of mastery over their money or their emotions.
This is a problem, according to Peter Moon, founder of Innerworth, a Los Angeles-based interactive website which acts as an online coach to traders and investors. Borrowing from Warren Buffet, Moon reminds us that the secret of smart investing is that, "You have to learn to control yourself. You can't let emotions get in the way of your mind."
Easier said than done. After all, Moon points out: "For two decades we have measured our self-worth by our net worth. Now with fear taking over where greed once was, a whole class of investors are going to act that fear out in their trading."
Moon acknowledges that there is no way to get rid of the emotions of fear and greed. The point is to recognise the emotional reactions as they come up and deal with them in the present. This awareness is a substantial step towards being in control of the investment process and acting according to a previously established trading plan.
In concrete terms, one of the ways of maintaining control is by keeping a trading diary in which all trades are recorded and then later analysed against the trading plan in an investment post-mortem examination. Flaws in either strategy or execution can be detected before they infect overall performance. Moon himself began to keep such records when he was a trader in stock options and commodities in the 1980s, and a decade later when he ran a hedge fund from London. Moon began with a pencil and paper, but Innerworth offers a computerised version for subscribers to the site.
Moon credits a four-and-a-half year, four-times-a-week tour of psychoanalysis as the key to his own investment self-control. "When I started out, I was a very undisciplined and emotional chap. Since I wanted to do well and make money, I figured it made sense to invest a bit in my own self-awareness," he explains. Moon notes that investor George Soros spent two-and-a-half years in psychoanalysis early in his career.
Not all investors have achieved a state of self-awareness. Psychologists report panic in the faces of some of their investor-clients, particularly over the last few months. This is particularly true of younger, high-tech investors or entrepreneur-investors, many of whom have no experience with the vicissitudes of the market.
"There are people who thought that they were totally in control of their destiny. They are competent people who now find themselves in a system where the rules have changed but they don't know what the new rules are," notes Stephen Goldbart, a psychologist and co-director of the Money, Meaning& Choices Institute in San Francisco.
The largest determinant of the level of fear felt among investors is whether or not their paper losses affect the way they live. "When investors feel that their losses will impact their current lifestyle, they tend to panic and change course abruptly," explains Steven Schroko, managing director at JP Morgan Private Bank in New York. This is not a good thing. "What they need to do is examine their investment process - revisit their asset allocation if they are not comfortable - in an effort to regain a sense of control over that process," adds Schroko.
The banker gives as an example one client who had a concentration of stock in one corporation. Even though the company had lost only 5 per cent of its value, the investor realised that given the volatility of this market, such concentration put his lifestyle at risk. So he ended up diversifying his portfolio to gain a measure of comfort.
But some investors just can't give up the dream of getting it all back. Says Peter White, managing director of Citigroup Private Bank's Wealth Advisory Practice: "A part of us just won't accept loss. We think that we are going to get back the things we have lost."
The markets are moving too fast for most of us to spend a couple of years on the couch in search of insight. But it may well be that the Masters and Mistresses of this new universe are those who accept their losses as well as their own emotions of fear and greed. This kind of self-awareness is a lot easier, of course, when those losses are on paper and don't cut into the mortgage and tuition payments or drain the retirement plan.
а этот Innerworth забавен - можно поиграть в настоящий психоанализ, что-то вроде двух недель бесплатно; потом, конечно, начнут зазывать на поле чудес...