The power of the daydream in online investing

March 23, 2010

One aspect of all-or-nothing thinking that we use to scare ourselves with is taking what is a process and turning it into a final and irrevocable outcome.

This is most often done by a combination of conscious and unconscious thought. The conscious aspect is simply freezing a moment in time and taking it to be an end state. The more powerful unconscious aspect is the role of fantasy intruding upon conscious, intentional thought. Our minds are very skillful at weaving elaborate fantasies out of the barest of mental threads.

What is the single most powerful and unappreciated fact of mental life? No contest: It is the considerable amount of time spent totally lost in waking fantasy. And most often, not even knowing it!

By fantasy, I mean a daydream, a fictional story made up of fleeting pictures along with a story line and associated feelings that we may take to be temporarily or enduringly real. Or fleeting images that we can barely even notice as we close our eyes for a moment. The reason we are unaware of much of the fantasy in our waking life is because it pops up quickly and we are not trained to be conscious enough to catch the images as they float by.

We tend to create fantasies to accompany many of the actual events of our lives. One small thought, one slight incident¡ªthat’s all it takes for us to spin off into fantasyland. And these daydreams can be very intense¡ªboth in the clarity of their images and strength of feelings¡ªand seem very real. They may be quick fantasies that last a few seconds to more complicated ones that last for minutes. In some ways, they are much like dreams we have while sleeping. The main difference would be that dreams while asleep do not have the partly conscious aspect that makes up daydreams.

Fantasy and the Market

Much of how we interpret the world in general, and scare ourselves in particular, is based on inner fantasy¡ªnot the actual events of our lives. From the wonderfully positive, hopeful, and uplifting to the dismal, catastrophic, and perverted¡ªall concoctions of our own active imagination.

The outcome of a fantasy may be viewed as a real and final state. We forget that we have created this inner story. And we don’t realize that we have made something concrete that is a actually a process.

These fantasies may be especially painful and frustrating when we focus on our investments because our artificially constructed and irrevocable end states do not acknowledge the obvious dynamic, fluid nature of the market.

So, the process of the stock price going down is immediately viewed as a final end state. We think it will fall and stay down rather than go down temporarily and climb back up again.

It is interesting to watch this process of thought and emotion in oneself when there is a sudden and violent drop in a stock. Or a protracted correction in the market for days or weeks at a time.

It is equally interesting (and much more enjoyable) to witness the fantasies which arise as our stocks are making money. All kinds of fantasies of how we might spend our profits may fleetingly pass through our minds as we calculate how much money we are making. Clearly, one of the psychological payoffs to online trading is the time spent lost in this delicious reverie. But here is an example of a fantasy which goes the other way.

A Roller Coaster Ride Through Hell

One morning in the summer of 19991 sat in front of my monitor and watched in near shock as one of my holdings, CMGI, a very volatile Internet stock, dropped nine points in an hour and a half in early trading.

I was getting pretty squirmy in my chair, wondering how far down it would go. I had decided when I bought this stock that, because of its volatility, it was best to view it as a trading stock, not a long-term hold. It was moving down too fast.

To add to my torture, I opened my portfolio evaluator window which showed me, down tick by down tick, exactly how much money I was losing as it plummeted. The loss was mounting up. Shock was replaced by anger. I knew this stock moved sharply but this was disturbing.

In the course of this ride down, I began to berate myself for getting involved with such a wild stock. I had traded this stock a few times over the months and had done pretty well, holding it for a few days or weeks at a time. Each time I had made a healthy profit. But right now I couldn’t think about how much I had made taking advantage of this very same volatility.

It felt like I was going through a miniversion of financial hell. This fantasy hell is an easy state to get into when you are watching a plunging stock very closely like this. I had negative fleeting images, negative thoughts, imagined catastrophic losses, along with and an industrial strength measure of fear.

After an hour and a half, lo and behold, the stock reaches some kind of bottom, and slowly begins climbing back up. And keeps climbing. Even faster than it had been brought down, it was now bouncing back up. I couldn’t believe what I was seeing. There was no explanation for the quick bounce.

Within a half hour of reaching its bottom, the stock was up six points. From its bottom, the stock had gone up 15 points in a half hour. And it finished up for the day.

At the time, I had never seen any stock recover this far and this fast. The following months would provide many occasions to see other fast-moving Internet-related stocks make similar reversal moves. But this one was striking to me. From inner hell, suddenly the sun came out and everything looked good again. A roller coaster ride past the shadow of death and now back out to roses and lollipops. And all just by watching a stock graph!

The moral of the story is twofold: (1) don’t take the process for the outcome and (2) be aware of and learn to control the influence of fantasy on your disciplined decision making.

Discipline and the Mind’s Productions

Crucial for the disciplined online investor is the ability to control the fantasies produced by the mind. It’s not that we can normally con?trol what passes through out minds. For the most part, we can’t.

Unless we have had a lot of meditation experience, stopping this flow of thought just can’t be done. Thoughts, fleeting images, as?sociated feelings¡ªall will jump forward into awareness on their own. This is simply what the mind produces.

If you don’t believe this, it is simple enough to test it for yourself. Sit for 15 minutes quietly in a chair and close your eyes. Simply pay at?tention to the thoughts and images that come up. One of the astound?ing discoveries that anyone makes who tries this exercise in good faith is how truly out of control our normal thought process really is.

Thoughts, images, and feelings may rush forward, begging to be taken seriously and to be acted upon. It is our job not to be taken in by this deluge of material. We must realize that it is in our power to refuse to take a fantasy seriously. Or to stop the emotion of fear from dictating our behavior.

Since weighing the various factors that go into decision making is hard enough, for online investors, making rational decisions with?out the interference of confounding emotion will normally be to their advantage.