Principle 5

A continuation of the series of posts relating to 'Factfulness'.

The fear instinct and panic-selling.

Investing is often driven by emotion; in particular, greed and fear are often said to drive investors - and ruin their financial returns. In this post I will mention and discuss some of the interesting things Hans Rosling had to say about fear, and how they connect with investing. 

• "When we are afraid we do not see clearly."
• "Critical thinking is always difficult, but its almost impossible when we are scared. Theres no room for facts when our minds are occupied by fear."
• "Get calm before you carry on. When you are afraid, you see the world differently. Make as few decisions as possible until the panic has subsided."

Basically fear is equal to factlessness. If you are scared, you act without analysing facts. In investing, you want to always analyse facts. Letting fear grip you is like taking your wallet and throwing its contents around you. This is why it is better to not act when you are feeling fearful; in investing it is more important to know when not to act than when to act. If you sell out of fear, you are probably losing an opportunity and giving others money. 

• " 'Frightening' and 'dangerous' are two different things. Something frightening poses a perceived risk. Something dangerous poses a real risk. Paying too much attention to what is frightening rather than what is dangerous - that is, paying too much attention to fear - creates a tragic drainage of energy in the wrong directions."
• "Risk = danger x exposure. How dangerous is it? And how much are you exposed to it?"

Risk and fear must be distinguished between. One is real, and the other is imaginary, and investing is about what is real. Mixing these up will lead you to behave irrationally and may result in you selling after a correction offers a golden opportunity. As Howard Marks said, in uncertain times - when you are likely to be more afraid - is the time when the best bargains are available.