“The Boss” Bruce Springsteen once sang that “you can’t start a fire without a spark”. This week, the Coronavirus definitely proved to be more of a powder keg ready to explode. The ripples of this have been felt far and wide in society, with the FTSE 100 dropping almost 25% in the last 5 days (although as I write this there has been a slight rally). In comparison, the football index FTSE has so far proved to be far more immune, with the footie dipping only 1.37% over the last 24 hours.
This hasn’t stopped many feeling legitimately worried about their holds. No-one likes to see their portfolio dropping. But is there a danger that genuine concerns can morph into full-blown hysteria. So, psychologically speaking, what causes the over-reaction of panic, how does it spread and how can traders navigate this period?
Why Does Panic and Misinformation Spread?
Emotional Contagion refers to how feelings are spread from one person to another. We literally catch other people’s emotions and is best thought of as a form of attitudinal osmosis. For example, research has found that people work harder on a task if the person next to them is putting in a lot of effort. Likewise, football fans feel more intensity and positive emotions if part of a large crowd who are also celebrating. Suicides and riots have also been found to be exacerbated by emotional contagion. Given how widespread it is in real life, it is probably a fair bet to say that this phenomenon occurs on Football Index. What this means, is that one person’s worry can spread quickly in a group (see below).
Group Think and Echo Chambers
Group Think refers to how if the majority (or indeed the loudest) opinion is not challenged or scrutinised, it can become accepted as true. This in itself isn’t the biggest issue, but if that opinion reverberates around an echo chamber, such as social media where we can self-select who to follow, then opinion can quickly become seen as ‘fact’. This means it is a breeding ground for Chinese whispers. They say a lie travels faster than a truth, but on Football Index a half-truth seems to travel fastest.
This is how many Football Index zombie myths (so labelled as they never seem to die) flourish. In the past this has been over-stating the impact the word ‘united’ has in media scoring towards Man Utd players and the impact of crossing in winning PB. In the current context of FI this week, this can lead to more and more listing their players or ISing them through unfounded fear of either the financial health of FI or through short-termism in trading.
A recent study by University College London found that uncertainty is one of the biggest sources of stress. In many cases, uncertainty is even more stressful than the worst-case scenario. When we know the worst-case scenario, we can adjust and prepare accordingly. But uncertainty can feel worse, as it is where ambiguity and misinformation flourish. Given that the country (and indeed the world) doesn’t know the extent and peak of the Coronavirus, we find ourselves with an ever-changing picture. This is reflected in the football world, which of course impacts somewhat on FI. Pro-active announcements, regular comms and new dividends will help stem the flow, but it is understandable why this leads to increased uncertainty
5 Things Traders Can Do
1) Knowledge is Power
if uncertainty breeds stress, then knowledge brings power. Former American Secretary of Defence Donald Rumsfeld once commented that “there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know”. Essentially, once we accept what we do and don’t know; be it about Corona itself, what the footballing authorities plan to do and any future FI announcements the better. This means reading information from their original sources and not taking what is said on social media as gospel.
2) Remember What Makes FI Unique
In his latest update, Adam Cole gently reminded traders about what makes FI unique. It can be a three year bet. Over time, knee jerk reactions and irrational trading are the most likely ways to lose you money. Shor-term trading offers a good pathway to profit if you have fast fingers. But if you don’t, or if you feel you are trying to force it, sometimes doing nothing or trusting your initial thought process may prove wise
3) See the Opportunity
Even Littlefinger in Game of Thrones knew that ‘chaos was a ladder’. But to thrive in such conditions requires a certain attitude. Researchers from Staffordshire University have explored two different mindsets; that of ‘challenge’ or ‘threat’. In a challenge mindset, people tend to be more proactive and focus on what they stand to gain if things go well. Whereas in a threat mindset, people tend to be more reactive, have higher levels of stress and dwell on what could go wrong. A great example of this is in the following experiment. What does the below say?
Some will read it as ‘Opportunity is Nowhere’, whereas others read it as ‘Opportunity is Now Here’. It really is just a matter of perspective
4) Have a Theory of Value
If you have a clear theory of value, it makes the drops less stressful for several reasons. Firstly, it means drops are less likely, as it is always those that the community know deep down have less value that are first to be IS’d. Secondly, when they do drop they are less stressful to hold, as if you have more money you are confident in topping up or if you can’t afford to do so are more likely to wait to them to rebound. There are many different ways to value a player, but for an example of one of the factors that I use to partially value players, see below.
5) When the fun stops, stop
If you found the past few days too stressful, then it may be worth looking at your relationship with Football Index. It can be a great product which has a unique selling point of not being an ‘all-or-nothing’ bet. It becomes problematic if it is causing you to lose sleep or too much money, or is negatively affecting your mental health. Over the past few years, the growth of the index has been phenomenal. The next few years seem exciting with new additions on the horizon. But even within that, there will always be some lows amongst the highs. And if the stress of the lows outweighs the fun of the highs, it may be good to take a break.
Overall, the last few days probably haven’t been the most fun for a lot of traders. I expect it is a short term dip in an otherwise optimistic future. If nothing else, it’s usually a good idea not to make permanent decisions off the back of temporary emotions. Hope you all make more money soon. Onwards and upwards all!