Mid-flight, you hear a bang, and start going down. There’s panic everywhere, and the aircraft is starting to lurch one last time. The guy next to you is praying loudly. Before the last thud, you wake up. Bad dream. You wake up, because your pain-threshold is crossed, and your subconscious machinery notices this, thus pulling a trigger.
You are in a live poker game. Losing, of course. An hour gone, down a hundred dollars. Another hour goes by. Down three hundred. It’s starting to pinch you. Your mind is reporting to you that you are nearing your pain threshold, and is trying to make you leave the table. You ignore this report, and are down six hundred in the next few hands. Another pang. One last attempt from the mind. You ignore your pain threshold repeatedly. Now things really start to go wrong. When your opponent puts you all-in for fifteen hundred, you go with the move because you are making a set of nines, promptly ignoring the three heart cards lying on the table. Your opponent shows down the nut heart-flush to bust you completely. So, down US$ 2100, a hefty fine for ignoring your pain-threshold. Once it is crossed, you don’t feel any difference between losing US$ 600 and US$ 2100, until you lose that US$ 2100 and come to your senses. For the next seven nights you don’t sleep too well.
You work in a chemistry lab. Your absent neighbour in the overlooking cubicle is performing an experiment that springs a hydrogen sulphide gas-leak. The lab starts reeking of rotten eggs. You are at a crucial stage in your particular experiment. Can’t leave. Your mind is currently so focused on your experiment that it ignores all the warning bells being sent by your sense of smell. It forgets temporarily what it has learnt in safety class, that hydrogen sulfide lames the power to smell after a few minutes, and that of course the gas is poisonous, and because one can’t smell it after the first few minutes, one can drop unconscious, and then eventually die due to gas overdose. That’s almost exactly what happens, with the good fortune that just when you fall unconscious, your neighbour returns, and rescues you. In this example, because your sense of smell has been lamed, it cannot warn your system that your pain-threshold is soon going to be crossed.
When a market crashes, there’s pain amongst investors. Those with low thresholds bail out immediately. Those with high thresholds take time. Trending markets move fast, so almost always, they manage to cross the pain-thresholds of the majority of investors. These investors don’t feel the difference between being down 20% and being down 50% before they are actually down 50%, but by then half their equity corpus has been lost.
This is the age of crises. There’s one, and then there’s another. And so on and so forth. Having learnt from experience that markets are inefficient with the rider that the over-efficient media makes markets specifically over-efficient during a crisis, one learns that it is extremely lucrative to buy for the long-term in the aftermath of a crisis.
Needless to say, one is buying for the long-term in a market where there are good prospects for future growth. Crisis after crisis is triggered by markets where there are no prospects for future growth. Such markets take down even those markets with bright futures. During the first few crises, the dents in the market with growth prospects are big too. As crisis after crisis keeps coming, this particular market falls too, but lesser each time. Simultaneously, quarter after quarter reveals strengthening growth. Eventually, the nth crisis does not trigger a fall here, because a certain pain-threshold has been crossed amongst the investors of this growth market, who by now cannot ignore the quarter upon quarter net increase in sales and profits for the last numerous quarters as exhibited by this market, crisis or no crisis elsewhere. This particular market decouples, on the basis of its own strength, and its intrinsic and burgeoning growth. In this example, the pain is being caused by unhealthy markets, whereas the market where one is invested into is in good health. Here, crossing the pain-threshold makes the healthy market immune to the disorders that the other unhealthy markets are causing.