Knowledge is knowing what to do, wisdom is knowing when to do it
This adage is better known written as “no pain, no gain”. But, this version contemplates physical training, working 60-80 hour weeks to get promoted, and other if/then scenarios where the reward is not only the prize, but enhanced by sacrifice early in the process. However, written like our title shows, the meaning changes to one more in alignment with the lessons that the markets are constantly teaching us. In its simplest form, until we experience the pain of complacency and lack of discipline, we can’t truly understand the game well enough to win consistently.
The investment markets are much more like Las Vegas casinos than most individual investors think. We little guys get off the tour buses and head straight to the slot machines. Happily, in exchange for free drinks, we pull the one-armed bandits for hours in hopes of hitting the jackpot. With the advertised payout rate of 98%, we just keep on pulling and pulling in hopes of the big one, while our small wins get wiped out as we feed them back into the slots. Doesn’t this sound like the last few years in various investment arenas? New fads come along, we all rush to get our piece of the free lunch, the brokerages dole out small wins in IPO’s, SPAC’s, and cutely named groups like FANG, and poof, it all evaporates after we’re all trapped, fully invested, at the all time highs; some of us even leveraged with margin accounts, losing money we borrowed to get a bigger piece of the pie than we could actually afford. The big question is how to get the knowledge that the pain teaches without the knowledge that the pain causes? Then, and only then, can the gain be valued enough to protect, rather than continue to let profits build without a protection strategy.
It turns out that human nature compels us to want to consider our gains as house money; money we didn’t start with that belongs to the house, casino, or market. Then, if it’s lost, we can deny our faulty strategy, and rationalize how it wasn’t really ours. The problem is we become the most complacent about risk, and aggressive about our investment decisions at the ends of long uptrends. Just as our bets move from slot machines to blackjack to craps or roulette after we’ve won money in the casino, we move from Blue Chips, to tech stocks, to small caps, to options, to crypto as our arrogance grows with our profits. Then, at maximum exposure, often maximum leverage, the trend changes and the trap is sprung.
There’s no escaping the process, as there’s no escaping our humanness. The sooner we know the pain, the sooner we can know the gain, value it, and understand that it is our money now, and losing it is in fact losing our money.