Tuesday, April 24, 2007

What Leprosy Can Teach Us About Investing


Anyone who has ever had quad tendon surgery is intimately familiar with this concept. Try doing anything without the use of a quad muscle and then consider that the movement, or any effort to move it will cause your entire body to freeze as you attempt to deal with the searing pain it induces. Pain is your body's way of saying "hey, you are damaging me... stop it." The pain caused by hitting your thumb with a hammer while painful at first, is useful because it is your body's way of telling you not to do that anymore and probably saving you from losing the use of your thumb.

In their non-fiction book "The Gift of Pain", Phillip Yancy and Dr. Paul Brand describe a world without any pain:


Can such a place exist? It not only can—it does. But it’s no utopia. It’s a colony for leprosy patients: a world where people literally feel no pain, and reap horrifying consequences."

Yancy writes about Dr. Brand who ran a leper colony in Louisiana. Most people associate leprosy as a skin disease. It is not. What leprosy basically entails is the dying of nerves in the extremities. This causes the leprosy sufferer to feel no pain so a cut on a foot is not known and becomes infected, a broken ankle is not felt and heals disfigured. Those with leprosy, since they cannot feel any pain behave in ways that cause more damage to themselves. Dr. Brand descibes a young boy who reaches into a fire to grab a potato that had fallen off a grill causing third degree burns to his hand all the while feeling nothing and continuing a conversation as though it had not happened. The boy is amused by all the attention he gets from the staff and continues to do things that cause more harm to himself, eventually losing his hands to injuries he never felt. Eventually lepers become crippled due to injuries they receive or, if not medically treated, die from infections they do not know are ravaging their bodies. Brand and Yancy argue that the pain we feel from events actually protects us from far greater pain and harm.

So how does this involve investing Todd?

Investing involves some pain. Not all of our pick are winners and we all lose money from time to time. It is what we learn from that pain that matters . Why did we make the pick we did? Was it a "hot tip" from a cousin? Was is up big one day so we bought it not knowing what the company really did or what kind of financial shape they are in? Was there a stock that we sold because the talking heads on TV or the "analysts" said we should even though in our gut we knew we shouldn't, only to watch is double or triple after we sold? Did we buy a stock recommended by those newsletters we all get in the mail and lost a bunch? For a great analysis of these picks go the Stock Gumshoe here.

Doing any of these things when investing can cause you financial pain. Repeating them with more money on the line will lead to more pain and possibly financial ruin if the bet is large enough. An investing leper is someone who does not feel the pain of financial loss and continues to repeat the same mistakes until they have no more money left to invest. They refuse to learn from or accept the pain from their actions and repeat them with increasingly dire consequences.

In order to invest with success you must have a investing strategy. I am always amazed how people will invest thousands in a stock because Uncle Leo said to yet will drive to 3 different stores to save 20 cents on a gallon of milk. Why don't they take the same time with their investments than they do shopping for food or clothes? The strategy you begin with will not be the same you end with. Learn from the mistakes you have made (we all make them) and adjust your strategy to eliminate them in the future. Making an investing mistake is not a crime, repeating it is.

In 2003 I sold USG because I listened to analysts and talking heads who said the company would be ruined by asbestos induced bankruptcy. I then sat and watched as the stock doubled, tripled and then quadrupled. I vowed to never make that mistake again. Because of that vow I have held Altria (MO) since 2003 despite the dire predictions regarding their litigation situation and continue to hold Sears Holdings (SHLD) despite the "dying retailer" predictions on TV and both have rewarded my patience spectacularly. Had I not learned from my earlier mistake I would have sold both long ago and would have a headache from beating my head against the desk and I watched thousands in potential profits never materialize.

You will make mistakes, learn from them and avoid far greater pain.


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