This is Why You Need a Process

Ben Carlson writes about why it is so important for investors to have a reasonably thought-out process in place to guide their actions. Seemingly everyone else around us is going to be controlled by emotional responses to whatever may happen next. 

It’s only been eleven days since Donald Trump’s presidential inauguration.

A lot has happened in that time. We’ve had executive orders, immigration bans, protests, regulation changes, people getting fired and hired in senior White House positions and much more. It seems you can’t go a couple hours without something new happening that causes an uproar.

Political and financial pundits are jumping from one hotbed issue to another in hopes of giving a plausible explanation for what it all means going forward. The truth is no one knows what’s going to happen. Hot takes have replaced much of what used to constitute clear-headed analysis to the point that it’s nearly impossible to trust anyone to offer a reasonable approximation of what’s really happening.

Emotions are running extremely high. I don’t blame people for being emotional in these uncertain times. Emotions are what makes us human. But you have to pair emotion with reason if you ever wish to survive.

In his wonderful book, Deep Survival: Who Lives, Who Dies and Why, Laurence Gonzales discusses the importance of pairing reason with emotions:

Plato understood that emotions could trump reason and to succeed we have to use the reins of reason on the horse of emotion. That turns out to be remarkably close to what modern research has begun to show us, and it works both ways: The intellect without the emotions is like the jockey without the horse.

He continues later in the book:

The system we call emotion (from the Latin verb emovere, “to move away”) works powerfully and quickly to motivate behavior. […] Emotion is an instinctive response aimed at self-preservation. It involves numerous bodily changes that are preparations for action. The nervous system fires more energetically, the blood changes its chemistry so that it can coagulate more rapidly, muscle tone alters, digestion stops, and various chemicals flood the body to put it in a state of high readiness for whatever needs to be done. All of that happens outside of conscious control. Reason is tentative, slow, and fallible, while emotion is sure, quick, and unhesitating.

I love that the origin of the word emotion literally means “to move away” because that seems to be what happens to many investors when emotions run high in the markets. There are definitely times in our lives where it makes sense to act in a sure, quick, and unhesitating fashion but most of the time those emotions are going to get us into trouble when dealing with parts of our lives that require reason.

The craziest thing to me about the “Trump rally” in stocks since the election is how many investors have assumed that they know exactly what Trump’s plans will be with regards to infrastructure, jobs, and taxes. People have been surprised every step of the way on Trump’s journey to the White House. Most pundits and “experts” have been wrong the entire time. Do you really think investment professionals can accurately handicap his fiscal policy or economic plans? No one has a clue what they might look like, what will actually get passed or how much of a fight it will take to get something done on these fronts.

We all need to understand how emotions can unconsciously cause us to take action. Our president is emotional. His supporters and opponents are emotional. The issues involved invoke emotional responses.

This is why it is so important for investors to have a reasonably thought-out process in place to guide their actions. Seemingly everyone else around you is going to be controlled by emotional responses to whatever may happen next.

It may not seem like it based on recent headlines, but the stock market is only 1.3% or so off all-time highs. So the emotional response to politics has yet to spill over into the markets. At some point, it will (or at least that will be the reason given when stocks fall or volatility picks up).

I can’t imagine trying to invest in this type of environment without a well-designed process in place to guide my actions. It’s an environment that’s ripe for mistakes driven by fear, greed, and overreactions. Those investors who are able to ignore these emotional responses and stick to their process will have a much higher probability of success than those who do not.