“Nostalgia isn’t what it used to be.”
—Peter de Vries, American satirist
Who doesn’t love sitting around with old friends, reminiscing about the good old days? Even the most jaded soul will have plenty of fond memories stored in the recesses of his or her mind.
But inflation talk is ruling the markets right now. The one number kicked around more than any other yesterday was 9.1%. That was the inflation number here in the U.S. as the Consumer Price Index (CPI) showed up as higher than expected. Indeed, the highest since the year Ronald Reagan was inaugurated as President: 1981. And then we get the Producer Price Index before the market opened this morning at a whopping 11.3% here in the U.S. High inflation got me thinking about nostalgia. About “back then”, because there are most likely many readers that weren’t trading or investing in the Reagan years.
Before we look at some inflation data, some nostalgia, and some nostalgic biases (Van is smiling in heaven as I write that), I’d love YOU to tell me about YOUR very first real-money trade or investment. Send those notes to drbarton “at” vantharp.com
I’ll write a future article about my first trading experiences and include some of yours as well!
Now back to – ughh – inflation. I think this graphic from Compound Advisors tells us a lot:
The last time the CPI was this high, (it was already coming down, as you can see), the Fed Funds Rate was a staggering 12%. As a note of personal torment, the interest rate was still well into double-digits when I took out my first mortgage a few short years later. So, when we get nostalgic for the “good old days”, remember that the good old days also had some “good old baggage” associated with them. But nostalgia, not coincidentally, also plays a big part in many of our biases. Let’s dig in.
I’m sure you’ve had times where nostalgia (a sentimental and fond longing for the past) has made you wish for a “better” or “simpler” time from your past. Often, the loss of a family member will trigger memories and even a longing for earlier times when you fondly remember that person in your life. Even if it’s something simple.
For example, my brother-in-law passed away at too young an age. We recently reminisced about him sneaking away to score some Thanksgiving Day pie (before it was cut or served, mind you) while the rest of us were watching football. But we also reminisced about what a caring person he was to all members of the family, no matter the direct relation.
Last October, my wife and I flew to Oregon to meet three of my closest high school friends. We laughed about the old times, got caught up on the new things in everyone’s life and had a great week together.
And to top off my nostalgic trifecta, we recently celebrated my son Josh’s graduation with a PhD in neuroscience. He has just under two years left of Med School and then he’ll have his combined M.D./PhD degrees. He’s not going far away, but as our last child “leaving the nest”, the bittersweet emotions that have washed over me time and again remind me that he is moving to a new stage in his life. And my wife and I move to a new stage in ours. I couldn’t be a prouder dad and thinking back over the last 28 years has led to both laughter and tears.
The emotions I feel as I write these words are why nostalgia has the effect it does. They bring about a sentimental longing for the past. That, in turn, brings us to the reason for today’s article: While very few people have nostalgic feelings for inflation ripping higher, a recent trade gone wrong helped me to remember some of the core reasons why RJ Hixson is teaching the Systems Development course right now and will again in the future. It is so that we can have the tools to put emotions aside when they are not useful or not supporting us as traders and investors.
Our Emotions: Great Companions but Generally Poor Guides
See if you can relate to this scenario that I encountered earlier this year. I had just given away a good chunk of money because I was distracted. I say “given away” because that’s what it felt like. It still does. I was using good trading tactics, but I failed to properly consider all the conditions of my trade. To be honest, I was mad. I was mad at myself. I was mad at this stupid stock (which, by the way, had been a genius of a stock just moments ago!). I was mad at the nameless, faceless traders that bought this stock for a few moments when I wanted them to sell.
In my emotional state, I did something I almost never do. I jumped right back in and shorted the stock at its low. (Shorting “in the hole” as my old floor trader friend from Chicago called it.) Then, a really good thing happened.
This second mistake in a row actually cleared my head. I had made this mistake before. Sirens were going off in my head. My gut clenched up. And I did the exact right thing—I immediately got out of this ill-advised, emotionally driven trade. No thought involved. No analysis to see if, in fact, the stock could drop further. Nothing but a click of the mouse and out for a scratched trade (or a breakeven trade).
So, the story does have a bit of a happy ending. When the stock did snap back the other way, I was safely on the sidelines. And with my emotions now in check, I could go back and analyze this stock and the markets rationally. My strategy was done for the day on this stock. So, there were no more signals to act on. It was time to move on. And so, my lessons of the past really saved my bacon this time around. Lessons from the past may be becoming a new favorite category of nostalgia…
Trade And Invest Based on Your Strategy, Not Your Emotions
Let me be clear: I know of no trader or investor who makes better decisions when he or she is emotional. Not one. So as a public service announcement, let’s look at three steps to take that will ensure that you can make your trading and investing decisions based on proven strategy rather than your current emotional state.
Why do you enter and exit your trades and investments? If your answer is anything other than, “I base my entries and exits on a written strategy,” then you have left yourself wide open to make emotion-driven trades. Every good trader and investor I know has a clearly defined strategy that guides all their decisions. Strategies can include written trading systems, computerized trading systems, following every pick from an advisor and many others. But you must know and apply your strategy to get consistent results.
If you know you are in an emotional state, don’t take any action. If you find yourself getting emotional, just walk away and come back later. This applies to traders who are in front of a computer screen or investors looking at the stock tables in the newspaper (some of us still do that, right?). When you are emotional, your decisions are compromised. This is true for any extreme emotional state. Euphoria can cause bad decisions just like anger. So, if your stock has just made a huge move and you are ecstatic, you may want to buy every other stock in the sector. Take a deep breath and a long break. Then come back and go over your decision when you’re in a less elated state. And most of all, make your decisions based on your strategy!
Learn to change your emotional state. When I made my second mistake in this trade, I used a psychological tool that I learned from Van to immediately change my emotional state. There are some good resources for learning these valuable “state change” techniques. Van’s Peak Performance Home Study course is great and it is timeless. If you want a shortcut, RJ Hixson will be teaching these techniques in the September Peak Performance 101 Workshop.
Emotions are a wonderful part of the human experience. But rarely do they help us make right decisions for trading and investing. Stick with your proven strategy and leave your emotions for other areas of enjoyment.
We’ll talk lots more about inflation in the future as well. It is going to be a topic that drives markets in rapid fits up and down for a long while. While I was writing this article the one U.S. Federal Reserve said, “The Fed can do its job with accelerating to a full percentage point rate hike” and the S&P 500 jumped a whole percent! Hang onto your hats; news-driven volatility will continue to be the order of the day.
If you’ve found this article useful or thought-provoking (or both), I’d love to hear your thoughts and feedback. Just send an email to drbarton “at” vantharp.com. And don’t forget to send me some thoughts on your first trade or investment!
Great Trading and God bless you,
D. R.