When I was a kid, life hurt. We didn’t have all the safety equipment, rules and regulations to keep us from skinning our knees. When we got hurt doing something dumb our parents would usually say, “Well I hope you learned your lesson.” I rode a bike once with faulty brakes, and I knew it. I still carry scars from the resulting crash, but after that I took care of my bike. Pain is an unwelcome, but effective teacher.
During the 1980’s society began to change. A new attitude emerged that children needed to be protected from pain. Youth sporting events no longer had winners, to avoid the pain of losing. Schools stopped issuing “F”s so students wouldn’t feel the pain of failing. I sometimes wonder if younger generations are being denied the opportunity to learn valuable lessons from their own mistakes. Societies’ obsession with preventing hurt means the lessons that pain is meant to teach often go unlearned.
Perhaps nowhere is pain a better teacher than in financial matters. I agree with many of the greatest investors of my life that their best lessons were learned from their failures. When people make financial mistakes, the pain is real, and the lessons can be priceless. Yet policymakers seem a bit obsessed lately with trying to remove pain from our financial lives.
As an example, the economy currently suffers from a labor shortage, partly due to people not returning to available jobs because their unemployment benefits are so generous. Being unemployed should hurt. The purpose of the pain being to encourage every possible action to find a job.
In 2007 a housing market collapse was magnified as people who were given easy access to credit bought homes they could not afford. Borrowing money should hurt. The pain should be enough to encourage careful thought before burdening yourself with debt. As we deal with a runaway real estate market today, much of the situation is caused by extremely low interest rates. People again are often buying more house than they should, because borrowing doesn’t hurt enough.
The stock market each day is tossed about by the day trading habits of newer investors. Buying and selling stocks has become too easy, using new free trading platforms (which aren’t really free). Trading should hurt. In my youth, high trading costs made you think carefully before acting, and encouraged you to buy for the long term. Now regulators are looking at finding ways to protect the younger traders from the financial losses many see coming. Why? I ask. If they are to fail, let them. It would be one the best investing lessons they could learn.
Everything in life involves risk and sometimes, feeling the pain of taking a bad risk is the best way to avoid more disastrous mistakes in the future. Pain teaches us what not to do. Let’s not regulate so much that younger generations are denied the freedom to learn the painful lessons that led to the success of so many of their parents.