PERFORMANCE ANNOUNCEMENT

As Of: February 8, 2008

DO NOT PANIC

Trust Your Instincts

    You may have recently heard a number of television advertisements for trading systems that "take the emotion" out of your trading. This is stated with such authority, it seems unquestioned that emotion must be bad. What happened to your parents advice: "Listen to your heart", "Trust your instincts", "If it doesn't feel right, trust your gut and get out"? There is no question that the brain processes far more information than we are consciously aware of. What we refer to as 'instinct', is the brain arriving at a conclusion at a deeper level, based on pattern matching with prior experience and assimilation of data on a much broader scale than we can logically and consciously deal with. Species survival is based on instinct that has developed over hundreds of thousands of years. Has it suddenly gone out of fashion?

    Laurence Gonzales, in his book Deep Survival, says the following about emotion: "Stress releases cortisol into the blood. It invades the hippocampus and interferes with its work. The amygdala has powerful connections to the sensory cortices, the rhinal cortex, the anterior cingulate, and the ventral prefrontal cortex, which means that the entire memory system, both input and output, are affected. As a result, most people are incapable of performing any but the simplest tasks under stress. They can't remember the most basic things. In addition, stress (or any strong emotion) erodes the ability to perceive. Cortisol and other hormones released under stress interfere with the working of the prefrontal cortex. That is where perceptions are processed and decisions are made. You see less, hear less, miss more cues from the environment, and make mistakes. Under extreme stress, the visual field actually narrows. (Police officers who have been shot report tunnel vision.) Stress causes most people to focus narrowly on the thing that they consider most important, and it may be the wrong thing." Mr. Gonzales is describing panic. Panic may not serve you well in a modern technological world where the body's natural responses may be at odds with the correct solution to a problem. For many people, a computer guided machine can perform certain tasks better than a human.

    However, we also have to consider the case of the elite performer. People who are true elite professionals in their class can still generally perform better than a formula guided machine. I would rather have a veteran combat tested Air Force pilot at the controls of a commercial plane I am riding in, rather than a computer program written by some geek who has never been upside down in a plane. No robot can do what Tiger woods can do on a golf course, and I do not believe that any computer can anticipate new market conditions and trade better than a seasoned, disciplined trader. Notice I used the word 'disciplined'. The elite performer does not panic. The elite performer imposes sufficient discipline over his emotions to take advantage of his training, experience, and instincts. Emotion may be detrimental in an inexperienced neophyte, but disciplined emotion is essential for the instinct and "feel" that gives an elite performer his edge.

    While we are encountering unusually volatile investment markets, the answer is: Do not panic, and trust your instincts. If you are not experienced enough, or disciplined enough, then consider turning to an experienced professional for assistance.