Pain/ Pleasure Syndrome
Greed is a bottomless pit, which exhausts the person in an endless effort to satisfy the need without ever reaching satisfaction
Erich Fromm 1900-1980, American Psychologist
This article was written for our subscribers because of the reaction the price surge in one of our holdings generated (ALTI). Essentially it boiled down to the fear one faces when dealing with the prospect of a huge fast win. This is a very common syndrome. When a stock suddenly goes up most individuals become paralysed and then move to the indecisive "should I sell or should I hold for more gains syndrome". It's funny that they never go through this type of fear when they are losing; here they simply come to the conclusion that yes we are going to hold for the long run. When the stock has lost anywhere from 50-80% of its value then they decide its time to sell. Very few individuals think about selling once they are holding 100% or more of gains; they become greedy and fall into the more is better state. The worst thing that could happen is that the stock ends up going higher but either way you closed your position with a huge profit. Don't waste time with what if scenarios but deal with what is happening.
So once again we would like to state that this article came into being because of some of our subscriber's reactions to the huge price surge ALTI experienced 2 weeks ago (Feb 10th and Feb 11th). This is not a promotion for ALTI or for our stock picking skills. It's simply an examination of how people deal with the concept of winning. It also appears that most individuals are better prepared for dealing with losses then with gains.
As soon as ALTI's price skyrocketed last Thursday (up over 90% in one day), we received a plethora of frantic emails. The central theme was fear, paralysis (inability to make decision) and wanting specific directions and guidance. Now lets stop for a second here. How many of you write in asking when to sell a stock, how many of you become paralysed when you're holding a loser. 90% of the time you find ways to rationalise your decision of holding onto a loser, even after you have been given instructions to dump it. But now when you are holding a winner you have a problem making a decision. Could it be that we want to lose so badly that we do everything in our powers to make this nightmare come true? Is this perhaps another clear-cut example of the secret programmed desire to lose syndrome. Why is that we cannot make a simple decision? Why can't we just say " hey I am up over 90% or 100%, let me get the hell out and who cares if it goes up another 90%". Instead we will sit and try to figure out if we can squeeze a little more out of the stock, we will worry that if we sell now we might lose a potential 10-50% down the line. We never stop to think that on the same token its possible that we could lose all the profits we made to date.
We are one of the few services who have openly stated that it is our mission to push you to think and take control of your health and wealth. This stance has angered many but for those of you that have stuck through with it, your emails show us that this stance has indeed produced the benefits we hoped they would. Its interesting to note that we received so many emails on ALTI, even after putting out a whole set of instructions on taking profits and how to determine what type of trader you are less than 3 weeks ago. (These instructions have now also been put in the members only section of our website)
This secret desire to lose syndrome we believe now is rooted in something deeper that we would like to call the Pain pleasure syndrome. To better illustrate this point lets look at how most of us enter the markets. We usually enter as short-term traders trying to or should I say hoping to make serious money by jumping in and out. Off course the only things going up as we jump all over the place like grasshoppers on acid are our blood pressure levels, stress levels, and levels of madness/insanity as we keep getting slammed into the dirt. Lets look closely at the concept of short term trading and why so many people are attracted to it.
When you enter the market you are basically entering an ongoing battle/war, but there are needless battles and necessary battles. The smart warrior does not take his blade out unnecessarily, preferring for the most part to steer away from a fight rather than seeking one. Using this analogy short-term traders are battling each other on an hourly and daily basis and for the most part wasting their energy on a futile cause. Short term trading basically comes down to the fact that you are subjecting yourself to unnecessary danger voluntarily. What happens when you do this, well chances are that you will get l killed before your time and you never ever win the war?
So it can be said short-term traders and especially day traders are sadomasochistic in a way and that they seek to expose their bodies and minds to unjustified amounts of stress and pain only to make an occasional big score. Most of the time they are involved in a process known as scalping (another pain full process as indicated by its name) where they only extract small amounts of profit but yet risk huge amounts of money to do this. The risk does not truly justify the reward. You are giving up peace of mind, health and your savings to make several small scores (day trader) or hoping (the key word being hope and as we all know hope usually leads to disappointment and then frustration) to hit several big ones in a rather short period of time (short term trader). The end result is that this type of person usually ends up financially 6 feet under.
The wise trader simply sits and watches these idiotic short term traders battle it out to the end. When they have massacred each other he/she simply comes over and starts picking up all the spoils at ridiculous prices. For the most part he does not even have to draw his blade out of its sheath. Day traders love the most pain, followed by short-term traders; long-term traders understand that patience is a virtue and that ones health comes above everything else. They slowly position themselves for the kill, without really having to do much killing. Since a war is a composition of battles, the only to make sure you live through and win a war is to fight as few battles as is humanly possible.
This pain pleasure syndrome is basically an extension of the secret programmed desire to lose syndrome. Every time we lose instead of taking time out to see where we went wrong we jump in hoping to win. After losing several times in row, it takes just one win to give us enough hope and courage to take several more severe beatings. In other words we are so desperate for that sense of winning (pleasure) that we are willing to descend into the pits of hell to get a brief taste of it. What we really forget is that we are really going nowhere and that we are winning nothing. When you subject yourself to huge levels of stress and mental anguish you forget what the sensation of being stress free is (this was the state you were in before you started your idiotic trip). So when you experience that occasional win, all you are doing is reverting to your former state. However this state of peace (pleasure) lasts for such a brief moment that you keep trying to get more of it. The sad part is most individuals never stop to think about what they are doing, that they are actually chasing a state they already once had and voluntarily gave up. The fastest way to re achieve this state of tranquillity and rise above it to the next level would be stop what they are doing and stay out of the markets for a few weeks to a few months.
So getting back to ALTI, the short-term traders jumped in and were trying to squeeze last minute profits. We as wise traders simply sat and watched them kill each other, that is why we did not send any emails out while all this carnage was going on. Its also why we did not answer any of your emails immediately because we wanted to force you to think about the situation. Never act on emotion, sit down and think about what you have to do in a calm rational manner. Look at it this way if you are selling something at a profit, there is nothing that can really go wrong. No one ever went broke banking profits. The only thing you stand to lose is potentially higher profits. So is it worth the stress of worrying how much potential profit you could lose and biting your nails and sweating like a pig while you are doing so. A really long-term stress free trader would have made the following observations
- We got in at an average price of 2.25, so at 5 dollars plus we are now up over 100%
- The volume on Thursday and Friday was more then the entire past 52 week volume
- There was no danger of breaching the main trend line
So based on this info he might have done the following.
Lock in some profits by selling half and then look to re deploy this money when the stock pulls back and pull back it will. He might even try to put aside extra money for this play if he thinks it has a great long term prospective. He would draw in the long term up trend line and most likely add to his positions when the stock hit this trend line.
This same method could and should have been applied to taking positions in GOLD, Silver bullion and stocks, OIL, URNANIUM ETC. Long-term investors took positions in Gold and Silver bullion and stocks from late 2002 to early 2003 and then sold half of them around the end of 2003. In 2004 they stood on the sidelines watching the market consolidate (watching the short term traders kill each other), yes bullion went up but the stocks got hammered. In 2005 they will start watching the trend lines closely and start preparing too slowly start taking new positions when the long-term trend lines are touched. Off course we will use trend lines plus all our other indicators to determine the optimum time to take new positions.
Each year we have tried to impart something to all of you. This year we are going to explore the necessity of becoming an observer and what an observer does. It's a critical component to ones health mentally and physically and to those who are trying to seek and find more in life. More on this concept in future updates.
The wish to acquire more is admittedly a very natural and common thing; and when men succeed in this they are always praised rather than condemned. But when they lack the ability to do so and yet want to acquire more at all costs, they deserve condemnation for their mistakes.
Niccolo Machiavelli 1469-1527, Italian Author, Statesman
Here are some thought on this subject by Dr Janice
I also call your attention to a seminal article written by Muraven and Baumeister entitled "Self Regulation and Depletion of Limited Resources"Psychological Bulletin Vol 126: 2, 247-259 ( 2000) as well as the excellent chapter by Baumeister entitled " The Psychology of Irrationality: Why people make foolish, self-defeating choices" in the 2003 book by Brocas
and Carrillo entitled "The Psychology of Economic Decision, Volume 1: Rationality and Well Being."
Basic from Baumeister are, in his own words:
Under emotional distress, people shift toward favouring high-risk, high payoff options, even if these are objectively poor choices. This appears based on a failure to think things through, caused by emotional distress. When self-esteem is threatened, people become upset and lose their capacity to regulate themselves. In particular, people who hold a high opinion of themselves often get quite upset in response to a blow to pride, and the
rush to prove something great about themselves overrides their normal
rational way of dealing with life.
Self-regulation is required for many forms of self-interest behaviour. When self-regulation fails, people may become self-defeating in various ways, such as taking immediate pleasures instead of delayed rewards. Self-regulation appears to depend on limited resources that operate like strength or energy, and so people can only regulate themselves to a limited
extent. Making choices and decisions depletes this same resource. Once the resource
is depleted, such as after making a series of important decisions, the self becomes tired and depleted, and its subsequent decisions may well be costly or foolish. The need to belong is a central feature of human motivation, and when this need is thwarted such as by interpersonal rejection, the human being somehow ceases to function properly. Irrational and self-defeating acts become more common in the wake of rejection. How often have people said to me when I was feeling unwell "Physician heal thyself!" If you think that's a challenge, then try this one: "Trader, get it together, take a really close look at yourself and what and why you are doing it and fix it. Trader, heal thyself!"
As both a physician and a trader, I can tell you that the latter is far and away more difficult.
Janice Dorn, M.D., Ph.D.
Director, Wellness and Longevity Centre
© 2005 Sol Palha
3 march 2005
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