The Ultimate Investor Pain Index

Taking a break from working on the latest edition of Hidden Gems (new issue out today!), we stumbled upon this quote:

To me, the pain is like an electric wand that hits you, inducing an immediate, excruciating pain that simply shuts down one's ability to do anything, except, perhaps, scream. Mental discipline simply does not work in these situations.

Now if you're like us, a description like that compels you to ignore your real work for a few minutes, and learn more about the sting of the tarantula hawk. A tarantula hawk is neither a tarantula nor a hawk. It's a wasp that hunts tarantulas.

Although it's certainly close, the tarantula hawk does not carry the most painful sting in the insect order. This is scientific fact, as determined by Justin O. Schmidt -- a seemingly masochistic entomologist who created the Schmidt Pain Index, vividly describing and ranking the pain he had experienced in his many years of studying, handling, and, apparently, angering the complete Hymenoptera order of stinging insects.

The Schmidt Pain Index: Investing Edition
The record holder of the Schmidt Pain Index is the bullet ant, carrying the alarmingly high 4.0+ ranking. (Its sting is described as "pure, intense, brilliant pain. Like walking over flaming charcoal with a 3-inch nail in your heel.")

After reading through Schmidt's descriptions, we couldn't help feeling cheated that no one has taken the time to create a pain index for the many detours investors experience along the ultimate path to long-term riches. No one, that is, until now.

So, here goes. The Investor Pain Index:

Rank

Factual Description

What the Pain Is Like

Example (Years)

1.0

Owning a stock that has gone up over time but has consistently underperformed the market throughout a long holding period.

Mildly annoying; like an old sports injury that acts up from time to time.

Whirlpool 1983-today

2.0

Buying a company that runs up by several hundred percent -- and then riding it all the way down.

The under-the-fingernail splinter.

Nortel (NYSE: NT  )
1985-today

3.0

Looking at two similar companies -- and choosing the wrong one to buy.

The reminder you'll always have of that time you tried to drink a Flaming Moe without extinguishing the fire first.

"Lycos is going to destroy Yahoo! (Nasdaq: YHOO  ) ."
1998-1999

4.0

While you've got a limit order in to buy something at $0.50 less than its current price, it takes off.

"... and with the second pick, the Portland Trailblazers select Sam Bowie."

Microsoft (Nasdaq: MSFT  )
Jan. 3, 1990.

5.0

The long-slow-decline value trap.

Any experience with your state's Department of Motor Vehicles.

Kodak
1970s-today

6.0

Holding something for a long period of time -- then selling it right before it goes rocketing higher without you.

Familiar with the life and times of Pete Best? The original drummer for the Beatles?

Apple (Nasdaq: AAPL  )
1987-2003

7.0

The biotech stock that gets hit with bad news results; sudden, violent, like getting your hand slammed in a car door.

"... and with the first pick, the Portland Trailblazers select Greg Oden."

Elan (NYSE: ELN  )
Feb. 28, 2005

8.0

The stock that goes down, and then you double down on it, before it really goes down; prolonged relived pain.

Like finding out your car is stolen, then remembering that you left your engagement ring in the glove box.

Northfield Labs
Nov. 2006 - July 2007

9.0

Shorting an unrelenting monster from the beginning.

You know that guy in Edvard Munch's Scream?

Google (Nasdaq: GOOG  ) Anytime

10.0

Selling uncovered calls of a monster.

Like childbirth ... without the baby.

Research In Motion (Nasdaq: RIMM  )
August 2006

In our Hidden Gems small-cap service, we've amassed a pretty good track record (61% returns vs. 25% for the S&P 500) at selecting quality stocks. And we were recently rated the No. 1 performing newsletter in the country. Nonetheless, we've experienced all sorts of pain over the years.

Everyone, no matter his or her long-term track record, has been stung more than a few times by stocks that were, apparently, angered. Unlike the moment you're stung by a tarantula hawk, the key to managing the investing pain is to maintain mental discipline.

Emergency preparation
Getting down into the 8s, 9s and 10s of pain in the investing world can bring a world of hurt that dwarfs the sting of the tarantula hawk in duration and severity -- if you haven't smartly structured your portfolio and selected your investments in the first place.

If you:

  • Maintain a diversified portfolio,
  • Aren't overweighted in any one company,
  • Keep an eye on valuations,
  • Add new money consistently through good times and bad, and
  • Select companies with wide moats and market opportunities that are run by disciplined management

... then you'll be OK.

We don't seek to mock investors' pain
Now, with smiles back on people's faces as the market returns to levels that soothe last summer's pain, it seems to be a good time to remember that additional investing pain awaits all of us over our investment lifetimes.

Hopefully, that's a mental discipline you already have, and hopefully you've prepared your portfolio in advance. If not, or if you're still working on it, join us for a free, no-obligation 30-day trial of Hidden Gems, and we'll share our list of 50 current recommendations, as well as our approach for surviving the market's pain.

And by all means, stay away from those bullet ants.

Bill Mann, Bill Barker's gigante amigo, recently learned that some indigenous peoples' manhood rituals involve wearing shirts with bullet ants sewn into the sleeves. If that were part of our initiation rituals, Bill would ask to be traded to another ethnic group. Bill Barker is short shares of Kodak. Bill Mann owns shares of Elan. The Fool's disclosure policy would also like to note that Yahoo! is a Stock Advisor recommendation and Microsoft is an Inside Value pick.


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