Worrying Yourself Out of Profits
By Van K. Tharp, Ph.D.
Every time Michael
thought about entering the market he said to himself "But what
if I lose?" Those thoughts often paralyzed him from action or
delayed his entry so long that many opportunities simply passed
before he would pick up the phone. When Michael did open a position,
all he could think about were negative consequences. "My system
is wrong at least half the time—what if this is one of those
times?'' He couldn't sleep because his mind was racing with those
“what if” thoughts. Michael suffered from a chronic "dis-ease"
of the mind called worry.
that both a biological component and a psychological component of
stress impair human performance and that it is useful to consider
these two components separately. The biological component is the
fight-flight response, a primitive reaction that early man developed
in order to survive. This physiological arousal causes people to
narrow their focus and put more energy into what they are doing. It
might help you run faster or fight more aggressively, but it does
not help you invest more successfully.
component of stress is what Michael was doing: worrying. It involves
a concern for one’s performance and its consequences. It is the
expectation of failure and the negative self-evaluation that
accompanies failure. Worry is probably the precursor to the
fight-flight reaction. Constant worry or intense worry certainly
produces physical stress and, as such a herald, worry might be
expected to only have a mild effect on performance. Research,
however, shows the converse is true. Though physical stress at
its extreme might result in death, worry generally has a much
greater effect on human performance than its biological counter.
Much of the experimental research on worry has dealt with a common
problem of students—their concern about performance on an
examination. Students who worry about test performance are likely to
do poorly compared with students who are not concerned. The worry
has nothing to do with preparation for the examination—it is
simply the fear of poor performance. As a result, concerned students
spend at least 25% of their conscious thought worrying about their
grades on the examination rather than devoting their full effort to
talking the examination. Michael, the investor who cannot sleep well
because of his concern over possible negative consequences, will
perform as poorly as the worrying students. His ability to forecast
price movement or select good investment opportunities does not
matter. His constant worry about his performance ensures that he
will not achieve optimum results.
Our senses are
constantly bombarded with millions of bits of information. One can
only select a small portion of this information for conscious
processing. Thus, people have a limited capacity for dealing with
information that comes through the senses. You can test this
capacity in yourself by reading the following list of numbers,
closing your eyes and then recalling as many of them as you can:
81 59 44 90 37
17 4 91 16
55 98 11 84
Unless you have an
elaborate strategy for organizing the numbers into groupings that
you can memorize, the basis for most mnemonic techniques, you
probably were not able to recall many of them. Fifteen two-digit
numbers far exceeds the capacity of most people.
Now imagine what
other people will think of you if you don't recall all 15 numbers.
Perhaps they'll think you are stupid or getting old or
incapacitated. In addition, imagine that you will be fined $1,000
for each number that you miss. You could lose up to $15,000 if you
miss them all. And what if the numbers you think you know turn out
to be wrong? You really could miss all of them!
Now, keeping all of
these thoughts in your mind, try again to recall the numbers.
Chances are you missed more of them, if not all of them, on the
second attempt. Why? Because worry takes up precious
processing capacity. When you worry and take up capacity, little
remains to perform more important tasks such as investment
decision-making. Worry takes away from your ability to pay attention
to what is really going on in the market.
You cannot notice
subtle changes in the market or respond to them if you are too
preoccupied with your fantasy of "what if." Thus, if
you worry about what will happen if you make a mistake, you probably
will make that mistake. By concentrating on potential mistakes, you
make them happen.
Worry and Perception
All the information obtained through the senses about the world
"out there" comes from a set of complex mental operations
called perception. These mental processes interpret and attach
meaning to the information the senses detect. For example, one might
see a set of black markings on a white piece of paper and
“perceive” it as a bar chart with a "head-and-shoulders
bottom" or some sort of "resistance" or, to a
non-technician, just meaningless lines. Perception is a filtering
process, which selects information for conscious, processing. It
selects information from the billion of bits impinging on our
sensory apparatus, so we can cope with the world. The selection
process is not random, but an active process that selects
information according to one's expectations. What one sees out there
depends on what one expects to see. The investor who expects to see
a bull market in stocks will tend to perceive information that
supports his expectations. He will "see" bullish technical
patterns in his charts and ignore any evidence that might contradict
the possibility of a bull market. Worry is a form of perception
based on negative expectation. People who worry anticipate negative
consequences. Most stressful events are stressful because of the way
they are perceived. The event is just an event. It is a person's
interpretation of the event that makes it stressful. Winners, for
example, have learned how to make it "O.K. to lose."
Losers, in contrast, become extremely anxious over losses and, as a
result, have difficulty "letting go" of them.
A large loss, or even the potential for a large loss, may devastate
the worrier. The person who dwells on the more positive aspects of
the situation will view the same event as a lesson or even an
opportunity. Suppose for example, the price of soybeans drops 20
cents per bushel. Let's look in detail at the reactions of five
commodity investors to this same event.
An old man with a smile on his face had been stopped
out of soybeans early in the day. He had a $3,000 loss at the time
he was stopped out, but the closing price of the day would have
amounted to a much larger loss. He felt good about himself for
sticking to his trading plan, so he responded to the news by smiling
and telling himself, "Great! You stuck to your system."
A soybean farmer had sold his crop two months
earlier at a much higher price because he was convinced that certain
big companies were manipulating the markets down. The 20-cent price
drop was, for him, further proof of manipulation. "Damn
them," he said to himself as he frowned. He remained in a bad
mood the rest of the day.
An active trader was convinced soybeans were due for a
major rally. He had predicted the drop during the day and had used
the opportunity to acquire a substantial long position in soybeans.
He had a small loss on the day, but he felt a sense of satisfaction
because his plan was working well. The only thing he said to himself
was, "I'm right."
A company president phoned his broker in a panic even
though he was short in soybeans. He now had a $3,000 profit and he
was concerned the market might go against him. His broker had
convinced him to enter into the position and now he was afraid that
he might lose his profit. "I'll lose again! " he thought
as he called his broker to learn if he was still bearish.
A financial columnist was long in soybeans. He had
absorbed the loss because he did not enter a stop with his order.
His predominant thought was that he did not stand a chance. If he
entered a stop, he was sure it would be picked off by the traders on
the floor. If he sold out at a large loss, it would probably be at
the low price of the day. If he held onto his position, the market
probably would continue to go against him. "Why me?" he
Notice how the same event is a
totally different experience for each of these traders. Three
traders actually lost money in the market, yet two of them had
positive experiences. Two traders made profits, yet both of them
were unhappy. Of course, most people are not happy about losses or
sad about profits. These examples merely illustrate that profits and
losses have nothing to do with experience. People create their own
experience by the way they think. Each person experiences life
differently because each person's thinking is unique.
People who generally worry a lot will worry a lot about their
investments. People who worry about their investments will tend to
do so constantly. In any situation that might involve a threat to
an individual's self-esteem, worriers show a marked capacity
reduction. Self-esteem situations involve a threat of failure,
whether it's a failing grade on an examination or performing poorly
in the market. In fact, investing may pose a tremendous threat to an
individual's self-esteem. The losing investor may not only
experience financial hardship, but may also feel that he has failed
to prove himself to those he loves or to himself.
How to Deal with Worry
do you manage worry? If you can discover how you worry, then a
simple solution to the problem is to do something else. If the new
solution doesn't work, then again do something else. Keep changing
your approach until you find something that does work. This does not
necessarily mean changing your trading system. If you execute a
system poorly, you will execute a new system poorly. "Changing
your approach" means to change how you think, how you make
decisions, and how you execute your system.
This solution is simple, but most people find it very difficult to
accomplish because they are locked into certain patterns. Changing
the way you think and perceive the world is not always easy. To
change the way you think, you must first discover how you start the
worrying process. Being objective about your own thinking is
difficult while you are doing it, but much easier later when you can
try two techniques to discover how you start worrying. The first
exercise is to review a past, painful market experience. It is the
quickest way to discover how you worry. You need only recall what
happened just before the painful experience. You have no need to
replay the experience itself.
the experience as if you are watching a movie of yourself. Sit back
in a chair and feel yourself in that chair watching yourself on a
movie screen. As you watch your movie, determine what started the
worry experience. Was it something you saw or read? Was it something
you heard or something someone said? Was it a feeling? What happened
next? Did you start talking to yourself? Seeing pictures? Did your
self-talk and pictures trigger the bad feelings? How did you do it?
people worry they typically get themselves into a negative feedback
loop. They talk to themselves, which produces bad feelings that results in more negative talk followed by more bad feelings and on
and on. Others see images, which produce bad feelings that make
the images worse, and so on. What kind of loop do you produce?
you discover how you start to worry and what kind of negative
feedback loop you produce, figure out some ways to change it.
Disrupt your loop in some way. If you say negative things to
yourself, practice following those phrases with a picture of
something pleasant. Try changing the quality of the voice you hear.
If you say negative things to yourself, say it in the voice of some
well-known cartoon character. Be creative. Do anything that is
different until you find something that works for you. If you have
trouble discovering how you worry from your past memories, then a
second exercise is to keep a worry diary. When you feel anxious or
worried about an investment, make a note of it in your diary. Do so
at the time you are worrying. Don't put it off. Be sure to include
the following information:
What were you doing when you started to worry?
What triggered the worry?
Was it someone's actions?
A visual image?
How did you go about
What kind of a loop do you set up for yourself?
Is this a new or an old pattern?
when the experience passes, make a note in your diary about what you
actually did, and what you could have done instead? Also comment on your
original diary entry. After recording your worry diary for several
weeks, you can study it objectively. What kind of irrational fears
do you have? How does worrying affect you as an investor? Most
importantly, you can determine how you trigger an episode of
worrying and how you go about worrying.
When you have a good idea how you start to worry, select some
changes you can make, such as those just suggested with the past
memory technique. Become aware of when you start to worry and
immediately select one of your changes. Once you discover how you go
about worrying and have selected some alternative behaviors,
practice using them. If you do so diligently, then the process will
soon become automatic. Imagine yourself in some future situation
where you would normally worry and practice some of the alternatives
you have selected. Once you can feel at ease in an imaginary
situation, you should be able to deal with the real situation.
Investors who go through this process frequently comment, "It's
just not the same anymore. I don't know what happened, but it's not
the same anymore."
This article is
taken from the book How to Control Stress To Become A More
Successful Investor, the second volume of Dr. Tharp's five volume
course on how to develop peak performance in the markets.
About the Author: Trading
Coach Dr. Van K Tharp, is widely recognized for his best-selling
book Trade Your Way to Financial Freedom and his classic Peak
Performance Home Study Course for traders and investors. Visit
him at www.iitm.com for a FREE
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