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James Sogi

3/13/2005
On Pain

Pain, mental pain...traders know the feeling: the physical aching constriction of the heart and gut, the bad thoughts. Why can some handle higher doses than others, and why do some have more pain and others less? No immediate physical damage occurs or causes it when you lose your money, love or honor, yet the pain is real. Pain is part of life from day one.

Real damage is caused by pain avoidance... drug abuse, alcoholism, unnecessary trading losses. What is a constructive way to improve performance over pain in all areas of life and trading?

One way is not to make a 'career' in the pain, but be consciously aware of the fact that you experience pain which allows stepping aside mentally, being aware of it, but not being consumed by the pain. This can even help in trading to buy at the point of maximum pain which is often a propitious buying point when everyone else is puking out inventory.

Running, tennis, surfing, yoga, biking are all good vaccines for pain and increase pain tolerance. Sport training regimens are designed to increase pain tolerance, but are hard to do while occupied in stressful painful work,

Knowledge and experience combined with will power increase performance under pain and pain management. It's called confidence. Babies don't have it, that's why they cry. Alcoholics and drug addicts don't have it, that's why they abuse drugs, to ease their pain. Losers don't have it, that's why they escape the position at a bad spot. One can't will away the pain, since it is sub-cortical, but understanding arising from experience builds confidence that the pain won't last forever, and that there will be a natural end to pain the normal course of things. A hike is harder when you don't know how far you have left to go, but if you know, its easier. Holding a losing position is painful if you believe it will last or get worse, but if you believe it will be over in due course, and that it is part of the process to profits, it is tolerable.

Pain, thoughts and emotions are the same for all. The illusion is that your own pain is unique and special. The realization that all share the same pain, the same hopes and needs is the basis for compassion and is the path of wisdom.

Read comments:

Kim Zussman comments:

One has to ponder whether poor track-records of most traders are attributable to intellectual or constitutional thresholds. Trading results are not monotonic with intelligence (there is, however, a study where high SAT mutual fund managers do better).

A low-beta portfolio is perhaps symptomatic of pain intolerance. Along these lines, nausea related to recent strategic revisions hopefully presages impending returns commensurate with higher risk.

On a related note, a certain past spec-flamed once commented that the pain of criticism is nothing compared to that of trading losses.

Craig adds:

Pain comparison has helped me through many a rough patch in all aspects of life and trading. My former life in construction blessed me with a glorious array of pain/fear benchmarks to apply to my later life as a trader. It is now part of my everyday thought processes, from simple tasks such as household budgeting to the more excruciating pain of trading drawdown.  One simple example: I was asked by a good friend, "Why not just upgrade your flight to business class? It's only a couple of hundred dollars more and it will certainly be a more comfortable flight." To which I replied, "Well I once spent 12 hours a day, every day, for five weeks working inside a few miles of 40-inch pipe that was buried 25 feet underground. So I'm pretty sure I can handle five hours in coach."

Every adversity that has been overcome supplies the well of experience from which we can draw these comparisons and I actually sympathize for those whose wells are shallow. Perhaps the point here is that the worst day doing something you love is still better than the best day doing something in which you simply acquiesced to due to circumstances.

Todd Colbeck comments:

Recovering from a painful experience is called resiliency. There are actual skills you can learn to develop resiliency. Check out "The Resiliency Factor", by Revich and Shatte. This is an essential life skill, not just trading skill. Much has been written about a topic called authentic happiness which is also related. These are practical, learnable techniques, not the rah rah type of motivational material in a lot of other training.

James Arvanetakis opines:

Pain is an indication of the misalignment between the self and reality. It is the mind's way of indicating an opportunity for learning and growth. Pain endurance is a reflection of our resistance to learning and change.

Laurel Kenner adds:

The point made by Mr. Arvanetakis carries into medicine. The April 2005 issue of the excellent "Bottom Line Health" newsletter published by our friend Marty Edelstein contains an article, "New Ways to Combat Cancer" indicating that long-term  inflammations including arthritis, bursitis, tendonitis, gingivitis (gum disease) and other "-itis" problems have the potential to cause cancer.

It seems that inflammation releases chemicals that can tip precancerous cells over the edge. Inflammation also plays a role in the progression of cancer, as immune-system cells called macrophages produce chemicals that allow tumors to create blood vessels that connect to the body's blood supply. This enables the tumor to feed like a parasite. The signal of inflammation? Unexplained fatigue -- and pain.

James Tar on Pain Relief:

Taking a loss, that is closing a position that realizes a loss, is a very wonderful thing. I liken it to cutting out a cancer that would otherwise kill you. How awful is it when you have loser on your pad and you sit there watching through the day, or in a recent case, watch it for days as it gradually, painfully ticks more and more against you. Nothing is worse in the world. Once you close it out, you have accomplished something. You have admitted that you were wrong, and you are relieved of a disease. Like in the great film, The Natural, "Losing is a Disease." Once you agree to part with it, you are ready and in better position to win.

P.S. I feel it is necessary to consider a particular instrument's historical volatility when determining when one should take the loss. The higher the historical volatility, the higher your threshold for pain should be to keep it within the portfolio, and vice versa. Should your "alpha bet" go bad, say 4-5% from the averages of the other instruments, then absolutely, the cancer is running wild and you should cut it out.

T.M. agrees: Once you feel good about taking a small loss because you followed your plan, you will become much a better trader. Nothing like holding onto losers watching them bleed and bleed and your short-term trade turning into a "long term trade" to give perspective on puking losers quickly.

James Lackey disagrees: Do you use your "positive energy" to let you feel when a small loss will turn into a big loss and take it? Every single trade starts out as a small loss due to the vig of the game. Does it feel good when a small loss turns into a huge profit? Do you kick garbage cans after taking a small loss that would have been a huge profit? Do you lose face when a profit turns into a loss? What is small? How do we define small, bleeding, short term and long term? What exactly is short term?

Why does any of this have to do with anything, of where I bought and at what price and the future? Does the market know? Are 'they' out to get me? Who are they? The day traders that are all gone since 2001? The hedge fundists that don't trade? What predictive value does where I bought, or you bought or the guy telling you to short sell have to do on the market in the next day week or month? Have we formed anything that even resembles a hypothesis, measure and test?

Of course I agree one must take losses. Regrettably, the house edge and the sole surviving day traders having to pay daily expenses, we must take profits. Then pay all our partners, the IRS, our wives children and finally the power bill. It is that grind that kills us. It is certainly not being scared to take a loss.

The only thing worse than taking a small loss is bragging about a small profit. I think accepting losses and losing is very bad. I think not profiting when the opportunity arises is reprehensible. Focus on profiting, defining, measuring and testing and then we have a slim shot of beating the market mistress.

Leave the "I feel" for the wife She will love you for discussing how you feel about your trades. Yet be careful even there, as counseled by Zussmanian trading wit and wisdom:

"The irony of trading, whereby you cannot boast of success lest family expect more, nor complain of failure and risk disdain." -- Kim Zussman

I have stated before, I have taken millions in small losses over the years. I have taken millions in small profits. I have paid millions in commissions. It all got me absolutely nowhere, as far as my checkbook is concerned. I paid millions to learn these lessons the hard way.

Your advice is as old as speculation that is as old as the hills. Only the brokers profit on such seemingly timeless advice...LACK

James Sogi is a philosopher, Juris Doctor, surfer, trader, investor, musician, black belt, sailor, semi-centenarian. He lives on the mountain in Kona, Hawaii, with his family