Wednesday, June 1, 2016

The Power of Negative Thinking

I know…. even the title sounds absurd. The advantages of thinking positively have been drilled into our heads ever so often and so forcefully since our younger days that even the notion that negative thinking could be advantageous sounds absurd. Well, read on dear readers. I don’t intend to, because I know I can’t change your views on this matter just by a few paragraphs, but I hope by the end of this read, you might agree that the concept of negative thinking being advantageous is not as absurd as it might initially sound. Of course, this being a financial blog, we are going to apply this principle to financial markets, but I am sure you will soon realize, that it’s equally applicable and helpful when it comes to life itself.

In the past three or so decades, the world has seen at least six financial crisis worth their name, namely savings and loans crisis of the 80s, Asian financial crisis of 1997, collapse of Long Term Capital Management and Russian financial crisis of 1998, the continuing Japanese financial crisis, dot com bubble and of course, the Big One. Wait, that actually makes it seven. My bad. And you know what dear readers. Each crisis was preceded by “This time it is different”. Sounds familiar, doesn’t it? And I don’t know where the markets will end up tomorrow, let alone where they will be at the end of the year, but I can promise you that there will be at least two instances of markets falling more than 50 percent in the next 50 years i.e. you can be sure that there will be at least two instances of markets falling 50 percent or more during our investment lifetimes. And this will continue as long we humans are governed by fear and greed. So basically, forever.

Imagine being 5 years away from retirement and losing half of all you are worth, what you have spent your entire adult life working so hard for just disappearing. Think it can’t happen? Just ask the Bernie Madoff victims and many of them would say if only they were so lucky to lose only half their networth. “Well, that was them. That’s never going to happen to me. I am smarter than that.” OK if you say so. Stay positive. But remember the last paragraph dear readers. “This time its different”. The only problem is that it never is.

And this is exactly where negative thinking comes in. Don’t know how to think negatively? Trust me its easy. Just follow these steps. Firstly, accept it. Accept that markets are not in your control. Accept that the markets will go down. Accept you will lose your hard earned money. There is nothing you can do about it. It has always happened and you are no different. Sorry to disappoint you. I know your mother always said that you are special, but the markets really don’t care. Come to think about it, this is rather like the first step of the AA program, isn’t it?

Let’s move on to step 2 then. Take it to the next level. Imagine the worst-case scenario. Imagine the market HAS fallen down 50%. How much money do you stand to lose? Put an absolute number on it. How will this affect your lifestyle? Will you be able to pay the next month’s mortgage? Will you be able to pay your child’s tuition? What about that vacation that you have been planning and saving for for years? Still going to be able to make it? Most importantly, will you be able to sleep at night? Pardon me if all this sounds too dark and gloomy. But your not thinking about them is not going to stop these things from happening.

And the thoughts presented herein are nothing new. The ancient Stoics knew the power of and practiced negative thinking thousands of years ago. In fact, they went a step further. Don’t just think about step 2. Practice it! Scared about losing half your net worth? Think that you are in an over paid job and scared that you might lose it and be forced to take on a lesser paying job? Well, spend fifteen days living a frugal lifestyle and face your fears. Not only just face, but rather live your fears! Embrace them instead of thinking “this can’t happen to me”. Be negative!

Living your fears can result in two scenarios. Scenario one, you live through your worst-case scenario and realize that things were actually not that bad as you imagined them to be. To quote Seneca, a prominent Stoic, “we suffer more often in imagination that in reality”. And just as an interesting fact, he wrote this way back in 65 A.D. So much for this time being different. Negative thinking exhorts us to live our fears, rather than spend a lifetime running away from them. We spend our lifetimes building bridges of fears and worries that we are never going to cross.

Scenario no 2. You lived your worst-case scenario and you turned out to be right! Your fears were totally justified! You absolutely hated it. Never again! Turning again to Seneca. “He robs present ills of their power who has perceived their coming beforehand”. Negative thinking, if nothing else, at least allows you to be prepared and does not allow you to be caught unawares. Also, the fact that your fears turned out to be as bad as you had imagined them to be, will force you to be all the more careful in your dealings. If you realize that you cannot afford a 50% fall in the market, you will now be more active in diversifying your portfolio. Remember, the key is not in thinking that all is well and market cannot fall 50% (positive thinking), but in thinking that it definitely will fall 50% (negative thinking). Maybe you will finally get down to saving for that rainy day portfolio that you have thought of maintaining for years now but never really got down to. Maybe that new car or Apple gadget will not come in its way now.

So, either Scenario one or two, it’s a win-win situation. And there is an added benefit that we haven’t even touched upon yet! Whether its Scenario one or two, you come out on the other side having greater appreciation and attaching greater value to what you already have! If “you don’t know what you got until you lose it” is true, then practice losing it!

I just now googled “negative thinking” and the first link I got is “Negative Thinking and How to Overcome It”. I hope you readers are now not so negative about negative thinking. Make no mistake dear readers; negative thinking is not the same as pessimism. I am a firm believer that we who are living in today’s day and age have it better than any other generation in the history of mankind. And I believe even more strongly that our future generations will be a lot better off than we are today. I like to think of myself as a rational optimist. You cannot not be an optimist in order to invest in stocks for the long run! But I hope you readers will agree with me; a little bit of negative thinking now and then doesn’t hurt matters too!

Take care and good luck! 

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