The nerve center typically hums along with a nicely balanced ebb and flow. Electrical signals chatter constantly. There’s no obvious pattern to the noise at first glance, but the discerning eye can just make out subtle synchronizations, regular repeating patterns contained within certain sectors.
Occasionally, like a flock of starlings pulsing in different directions led by the whims of a rogue bird, the electrical signals suddenly change directions, but some semblance of equilibrium is soon restored.
Rarely, one of these murmurations reverberates, drawing neighboring electrical signals in for the ride in a vast, ever-expanding ripple. A growing network of these impulses synchronizes in the same direction. Finely-tuned algorithms, designed to prevent damage in response to a threatening external stimulus, urgently trigger additional electrical signals to join along in movement.
The background chatter fades and a growing crescendo builds on itself. Soon, all the electrical signals are synchronized in a deadly march, all magnifying and reinforcing each other in a positive feedback loop, interrupting the normal function of the whole system. A fail-safe switch trips and the activity dies down, either by exhaustion or by enforced silence.
Everything is quiet. Stunned.
The collateral damage resulting from too much movement in the same direction is assessed. Led by a few tentative bursts, the background chatter slowly resumes and the whole system stumbles back on line, seemingly more subdued than before while new patterns fight to assert themselves.
I’ve just described both an epileptic seizure and a stock market flash crash caused by runaway high-frequency trading computer algorithms. Both can be seriously harmful, but both are (usually) self-limiting. A person with epilepsy, despite having these dangerous interruptions of normal neurologic function, can still harness their brain to do and accomplish amazing things. A flash crash in the stock market is similarly just a blip in the wider picture of a machine that has created a lot of wealth and functioned quite efficiently (on average) for a long time.
The flash crash of 2010 was created initially by a large rogue sell order that piqued the interest of multiple high-frequency trading algorithms designed to prevent excessive losses by selling on certain indicators of other large-scale selling. The problem spun out of control so quickly that the Dow Jones Industrial average plummeted more than 10% in ten minutes before circuit breakers stopped the action and allowed the dust to settle. Eventually, the market recovered 70% of the loss that same day, and the entire episode (with a few lingering consequences) faded into memory, nothing more than a blip on the radar.
I’d consider this whole episode to be representative of larger “blips on the radar”, including corrections and even bear markets. We know that, on average, the stock market trends inexorably upward and produces additional wealth over the long run despite frequent (and sometimes large) deviations and course corrections. The ability for the investor still in the accumulation phase (the target audience of this blog) to ignore the noise, ignore the fluctuations, ignore even large losses (which she knows will eventually prove temporary on a long enough time scale) is what makes for a mature and successful investor.
The problem with these scary episodes is that they are a powerful trigger for the amygdala, the fear center in your primitive brain. Your brain has an exquisitely evolved set of knee-jerk responses to certain patterns that served your caveman ancestors well and kept them alive. This primitive brain is finely tuned to rapidly act to avoid threatening things and pursue rewarding things. The lesson here is that this can interfere with your master plan and cause you to do something that will be harmful in the long run, like panic sell. It’s a difficult thing to do, and the mark of a mature investor, but do your best to ignore scary things in the stock market, and reassure yourself that simplicity works.
Stay the course, stick to your plan, and don’t mind the scary episodes along the way.
How have you dealt with stock market turbulence? Have you been rattled by a flash crash, or even a more drawn-out correction or bear market? Share your experiences in the comments below.