I often say in class that the study of markets is nothing more than the study of people. Markets move based on the decisions made by hundreds, thousands or millions of people, who in turn make their decisions based on their emotions and desires. Among these desires are the need for certainty, and the desire to avoid pain.

Pain Is Part of the Game

In markets (and in life) pain is unavoidable.

Everyone wants to make money, but nobody wants to lose money. Losing money is painful. But as a trader it is practically impossible to avoid losing money all of the time. No matter what we do, we are going to make mistakes or misread an investment or market environment and make a mistake somewhere. That is going to hurt.

When I look back on my time as a portfolio manager, this was maybe my biggest flaw. Although I had many good (?) ideas for trades, I was often hesitant to put them on because I “wasn’t sure.” I remember my boss continually pushing me to put on more trades and take more risk. In a way, my aversion to pain (losing money) was greater than my desire for gain (making money). So I did nothing, most of the time.

Mapping this to our lives, we just have to realize that all of our decisions are not going to work out. If we are highly impulsive people, we need more discipline around how we decide to act. But most people reading this blog are overthinkers and for us, we must accept that bad trades are part of life and that we will lose money (or time/energy/opportunities). Failing to act because we are afraid of the pain of being wrong just means that we will never take actions that lead to the possibility of return.

Equity: Your Pain Threshold

Beyond the willingness to accept pain, there’s also the question of how much pain we can endure.

In finance, I think of equity as the equivalent of a pain threshold. Equity is a buffer against losses. If losses = pain, the ability to absorb more losses (more equity) = higher pain tolerance.

In market downturns, those with the smallest equity buffers are usually the firms that get wiped out first. We’ve been talking about Lehman Brothers in class this week, which was one of the large investment banks that went down in 2008. Lehman had a 30:1 debt-to-equity ratio, meaning it had a very small equity buffer. When the market started to break down in 2008, Lehman was one of the first casualties, in part because it had such little equity (very low pain tolerance). Firms with stronger equity positions survived.

This idea also maps through to life. A person with a very low pain tolerance gets shaken out at the first sign of trouble. As an individual investor, if you can’t handle seeing anything red in your brokerage account, you’ll never hang on long enough to see any of your investments compound. The same is true if you’re a writer, a poet, a podcast host, a chef, an entrepreneur, or whatever. Whenever you put your work out into the world, criticism is going to come. There’s the barrier of not being willing to risk criticism (never publishing your work) and then the second barrier of continuing to create after the criticism comes (your pain tolerance).

To endure that pain, we have to build up our own equity buffers—our personal mental, emotional and financial reserves.

The Winners Are Those with the Highest Pain Threshold

As destructive as 2008 was, a ton of people made money—those were the people who had enough equity to ride out the storm.

The market rewards those who have the fortitude to sit through pain. There is an adage in markets (possibly from Warren Buffett): “be fearful when others are greedy, and be greedy when others are fearful.” Buffett steps in to buy when the rest of the market is panicking. He doesn’t avoid pain, but rather takes advantage of everyone else getting shaken out of their positions because they can’t tolerate the pain. (Incidentally, Buffett is sitting on a huge pile of cash—a big buffer—right now. He looks pretty fearful right now.)

The parallel to our personal life is clear. Whether we are creatives starting on our journey, or going through a major life change like a career pivot, we have to be prepared to endure pain and a LOT of it. Rejection, criticism, and setbacks will appear continuously. Dilettantes will get flushed out quickly—a writer who gives up at the first critical comment on social media will never stick with their craft long enough to become good at it. But people who have the perseverance to stick with something for years or decades basically always win.

Can You Take the Hits?

Whether we are investors, creatives, or just ordinary people contemplating a life change, if we are not willing to accept the risk of getting hurt, we will be waiting forever and will never take action.

Whether we are investors, creatives, or just ordinary people contemplating a life change, if we give up at the first sign of pain, we will never stick with our craft long enough to become good at it.

Whether we are investors, creatives, or just ordinary people contemplating a life change, if we have enough of a pain tolerance to outlast all of the posers, pretenders and dilettantes, we are very likely (perhaps guaranteed) to win.

Ready to take your hits?

Exercise

Journal on the following or discuss with a friend.

1)      Noticing

Where in my life am I avoiding pain or discomfort in the pursuit of something that I want?

What is the nature of the pain that I am avoiding? Is it the risk of losing money? Rejection? Criticism or judgment?

2)      Pain Tolerance

Where in my life do I wish I had a higher pain tolerance? Where do I tend to give up too easily or too quickly?

What are areas of life where other people tend to give up too quickly, but I am willing to sit with the pain, perhaps for a long time?

3)      Action

What is the smallest action I can take to embrace pain, or increase my pain tolerance?