Charlie Munger had to bury his adolescent son. Warren Buffett had to deal with his mother’s mental instability and his father’s death while a relatively young man. Seth Klarman had to deal with the pain of his parent’s divorce at an early age. When Peter Lynch was ten years old, his father died of cancer. Benjamin Graham was a British immigrant following the death of his father as a toddler.
A common thread among the world’s most successful investors is that you can point to some aspect of their life in which they experienced a significant hardship. It is entirely possible that the experience of these personal hardships have contributed to their ability to be successful investors.
When you own a business, either outright or as an investor in shares, you are going to deal with volatility. Profits will plunge. Adverse developments and news headlines will occur. The stock price will fall by 50% or more. Deep paper deficits are an inevitable component of long-term ownership in equities. It cannot be avoided (unless you’re Irving Kahn in 1928 having a hunch to sell all of his assets prior to the Stock Market Crash in October 1929).
If you want to earn 12% over 20 years with a stock, you have to deal with the two or three 40-60% drops in the stock. Aside from having the capital and making the investment selection in the first place, the avoidance of selling low is the third requirement for making real money in the stock market.
If you lead a life with limited adversity, it is entirely possible that seeing an investment fall in value from $10,000 to $6,000 could be the worst thing happening in your life, triggering the type of emotionalism that leads to wealth destruction by selling low.
Alternatively, those who have coped with death and other types of personal loss may be more inclined to approach paper losses philosophically and on a relative basis to true hardship. If you don’t feel deep pain during the deep declines that inevitably occur, you have a deep advantage because less gumption is required to hold on.
James Matthew Barrie, best remembered for creating Peter Pan, famously offered the line that style comes to those who try the least to have style. Perhaps there is a corresponding insight into holding through losses. Those who sweat the declines in their net worth the least are most likely to hold on through those declines and end up with the most wealth of all. And I would argue that those who have experienced deep, non-monetary losses may derive an advantage from that hardship when they turn their attention to investing because the pains associated with investing are trivial to what they have otherwise endured.