30 November 2007
Ask 10 people if the S&P 500 is up or down for 2007 and I would bet 70% would say it is down. That answer is wrong, since the S&P 500 is up a little more than 4% through November 30. Many people react to the daily movement in the markets emotionally - read “fear” - and never allow themselves to get to a position of strength, where they control their emotions (biases) and thus, have better outcomes.
Emotional competency is what separates high performers in society. High performance is relative to what the question is: In golf, emotional competency is the person that can make the five foot putt for the Championship; in my world, emotional competency is the person who does not panic in volatile markets. But whatever the profession, there is something real going on in your body that you need to understand before you can become emotionally competent and perform in stressful situations.
The following diagram tells the story:
I will not go into all the hormones being released in our brain, but in quadrant 1 (Q1) and quadrant 2 (Q2), our bodies are in a highly energized state which impacts decision making. In quadrant 3 (Q3), our energy level and emotional level are low to the point that some people could experience depression. It is in quadrant 4 (Q4) where good things happen. Our higher emotional levels, paired with control of our energy, lead to rational decision-making.
To get to Q4, play the freeze game. Six or eight times a day, just freeze what you are doing and focus on how you feel, how is your breathing and heart rate, what is going on around you and what are you thinking. For example, if a car cuts you off, freeze right there and focus on what is going on: anger, fear, need to retaliate, increased blood pressure, and maybe even, as they speed off, a sense of calm since an accident was averted. Understanding your experience and the experiences of those around you can cause you to maintain control.
And control is necessary in volatile markets. Especially when the media is preaching that everything is out of control. I play the freeze game once in a wühile as I watch the news reports on a day when the market drops 200 points. Over the years I have become much less agitated and have turned those days into excitement (buying opportunities).
To suggest that anyone can control emotions all of the time is unreasonable. It is possible however to find in ourselves our own biases that are causing us to lose control in high energy, high emotion points of our day. It is through understanding our own biases that we can reframe our self-talk and improve our decision-making process to maintain our poise over day-to-day market movement, or five foot putts.