Emotion, Self-Doubt and the Investor

Emotion, self-doubt and the investor

In a great book“The Education of a Speculator”, the author Victor Niederhoﬀer writes about the importance of removing emotion when setting odds.

“Walk through the grandstand section of any racetrack and study the people. Observe their mannerisms, their gestures, voices, and facial expressions. Sense The emotion: the pervasive fear, anger, sadness, and shock – and that all too rare love of the jockey and joy of winning.

A race is an emotional roller coaster. The buzz of the crowd ampliﬁes as the horses round the turn and head down the home stretch. At the wire, the masses erupt when two horses appear to cross the wire together. Minutes later, the photo reveals that the favorite has been beaten by a nose. Some fans throw their programs in disgust, others criticize the ride by the jockey – who, they clearly feel, cost them their hard-earned money. Some argue that the race was ﬁxed, others sit in disbelief, as if they have lost their inheritance or grocery money. Many probably have. To the side, three men revel in self-adulation: “We knew this six horse couldn’t lose, Mikey, this one was ice cream.” Tomorrow, these people will probably be among the majority again, agitated and hurt that the gods of racing luck have suddenly forsaken them.

One thing is sure. Among the emotionally charged, you will not find one single long-term winner. Where are they? According to Bacon: “These quiet professionals are quite inconspicuous unless you look for them, because there are so many careless gamblers, crazy amateurs, jumping from one crackpot idea to another betting on hope and fear?” I show this passage to any trader in my office who is showing color or palpitation. It’s a quicker fix than a course in meditation.

Simple, one would think: the turf speculator must remove all emotion from the decision-making process in order to maintain objectivity. Ah, but this is easier said than done. Just like the stockbroker who sells indexes at the low tick in the midst of a severe decline, after mentally adding on car payments, mortgages, and orthodontist bills, the turf handicapper usually loses his nerve at exactly the worst moment. In the face of danger, one will generally do what is instinctual as opposed to what is logical.

The professional has no fear of losing because he has no emotional attachment to this money. His bankroll is merely a means of keeping score. Because he is conﬁdent that he will succeed in the long run, he is not susceptible to the pressure of failure. The professional will make objective selections regardless of the situation. But adrenaline often interferes.

The emotions a speculator feels as he screams to his broker for a ﬁll, angrily watches the price scrolling across the screen, sadly leaves the oﬃce after tapping out, or expectantly opens the newspaper to check the moves of his stocks and mutual funds are those of the racegoer. Videos of speculators in my business show them chain smoking, screaming at their brokers, or yelling at their subordinates. These expressions of emotion have within them the seeds of destruction.”

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