On April 17, 2018, less than an hour into its scheduled journey from New York to Dallas, Southwest Flight 1380 suffered an explosion in one of its two engines. Shrapnel peppered a wing and the plane’s fuselage. A smashed window led to the ultimate nightmare scenario: an open hole in a rapidly depressurizing plane, and passengers fighting to avoid being sucked out of the aircraft.
Unlike the “Miracle on the Hudson” in 2009, when pilot Chesley “Sully” Sullenberger safely landed his crippled US Airways plane on New York’s Hudson River, saving all 155 people on board, the Southwest incident resulted in the death of one passenger. However, the situation could have been far worse, and pilot Tammie Jo Shults was lauded for her remarkable performance under intense pressure.
How do professional pilots keep their wits about them in emergency situations with so much on the line? And what can we, as investors, learn from these terrible accidents? Here are two suggestions.
Be your own NTSB
One reason air travel has become as safe as it is today is because of the painstaking investigative response to these types of events. When accidents occur, the National Transportation Safety Board swoops in and examines every detail. If the problem was mechanical, new fixes are mandated. If pilot actions were partly responsible, new training procedures are put in place. One way or another, whatever caused that particular issue is identified and definitively addressed so the same situation doesn’t recur.
Of course, the precision involved in such meticulous investigative responses can’t be duplicated when it comes to the economy or investing. Air travel is governed by physics, where the same inputs produce the same results. In contrast, the economy and financial markets are not “hard” sciences. Sure, it’s possible to go back to a given recession or bear market and glean lessons from past experience. But those lessons are rarely ironclad — the next time around, investors may react differently to the same set of inputs.
This is why economists can’t keep recessions and bear markets from recurring, even if they closely resemble past episodes. There’s too much behavioral variability.
But even though there may be no way for an “Economic NTSB” to stop these episodes from recurring at a “macro” (national) level, it is possible to intervene at a “micro” (individual/personal) level. Often, the mistakes investors make are behavioral or emotionally driven. For these, being your own NTSB can be quite effective. Identifying investment mistakes you’ve made and putting corrective measures in place can keep you from repeating them.
Emulate the pilots
Faced with potentially crippling tension and fear, professional pilots manage to keep their wits about them. Recordings of their communications, even in high-pressure situations, reveal remarkable clarity and steadiness. How do they do it? They train and prepare, then rely on their training when an emergency strikes. These pilots are able to respond coolly under pressure because they’ve drilled for such situations in simulators. It’s not the first time they’ve seen something like this. While they may not have simulated the exact situation they face, part of their training has been, in essence, to repeatedly ask themselves, “How would I deal with ___?”
This is a key technique investors can emulate. In fact, we have some advantages over pilots in this regard, because we know that many of the “emergencies” we’ll face aren’t a matter of if, they’re a matter of when. Some of them, like bear markets, recur frequently enough that we’ll likely get to practice our response more than once!
Asking yourself how you’d deal with stressful investing scenarios is a valuable exercise. SMI suggests the following three-step process for preparing for future trouble:
Create a plan in advance — preferably in writing.
Rely on mechanical triggers for future decisions. This eliminates making judgment calls under emotional duress, a sure recipe for failure. SMI strategies are built on such mechanical triggers, and some (such as Dynamic Asset Allocation and Fund Upgrading) have defensive protocols already built in.
Stick to your plan! Believe it or not, this is the toughest part emotionally. But drilling for these scenarios in advance will help prepare you to control your emotions when scary future events arrive.
