201. Setbacks can be useful… even when they have no specific lessons to offer
“A bend in the road is not the end of the road… unless you fail to make the turn.” ― Helen Keller
For someone who benefitted materially from disciplined investments into large and flexi cap mutual funds, it was a rather big call to move out of mutual funds, lock stock and barrel, into a handful of direct small-cap stocks. This happened about four years ago. Although largely instinctual, this was not an impulsive call by any means. This “instinctual” decision was preceded by serious and rigorous study of the options at hand and was further sharpened by critical thinking. The decision was immediately vindicated by a near-daily rise in my portfolio value over the next five or six months. Then, the fall began. My stock portfolio fell conspicuously by about 40% over the next one-and-a-half to two years. It was not at all a pleasant time for me. I found myself in a deep, dark hole with no end and no light. If I had not moved my investments into stocks and remained in mutual funds, forget loss, I would have actually grown my portfolio value. Did I make a mistake — a colossal one at that, given that I subjected over 70% of my net worth to a seemingly unwarranted but heavy fall? Was there any lesson to be drawn from this huge setback? I could not find any lesson. My decision felt right. I entrusted my investment to an experienced investment manager who, I believed, had the right temperament, ability and enthusiasm to do well in stock investment. Nothing wrong with the decision at all. It was just bad luck. Afterall, outputs are a result of diligence and luck. Diligence seemed right but luck did not play out. There was no lesson to be learnt in how to improve “diligence”. Yet, in retrospect, this setback turned out to be very useful for me.
“Life is a series of experiences, each one of which makes us bigger, even though sometimes it is hard to realize this.” — Henry Ford
My stock portfolio did bounce back later on. By the end of 2024, it ended up better than my opportunity cost of remaining in mutual funds. My decision of four years ago seemed vindicated. However, my initial setback — the huge fall in my investment portfolio — prepared me for this rocky journey of wealth creation rather well. Although it’s been an experience of just one economic cycle for me until now, the setback made me keenly and perhaps even viscerally, aware of the role of luck in the eventual output of any of our endeavours. No matter the level and depth of diligence, the result may go against you, particularly in the short and medium term. In the longer run, however, good and bad luck tend to cancel each other out and the magnitude of success tends to be more or less in line with your competence, diligence and temperament.
Relentless success actually could be a disadvantage. String of successes when not interspersed with setbacks, could make a person fragile. Success in complex and dynamic areas of life such as professions, careers, relationships, health etc inevitably arrives on a jagged path.
I can’t imagine a successful marriage that did not face its fair share of problems (fights, bickerings, heart burns etc).
A healthier immune system is one that has encountered a variety of germs and developed antibodies to deal with them. This cannot happen without first having fallen sick with infections from a variety of germs. No wonder kids fall sick often until the age of five or so before suddenly becoming quite resilient.
All successful career journeys are inevitably punctuated by a number of missteps and failures.
Success materializes at the intersection of your innate abilities (competencies, execution abilities and intentions) and the environmental factors that you find yourself in. You may able to control and/or influence your innate factors but the world around you dances to its tunes. You cannot control the dynamism of the environments in which you operate. Even as you keep putting in the right kinds of efforts, sometimes you encounter successes and sometimes setbacks. As you continue doing this for long enough, cumulative successes tend to overtake cumulative setbacks.
“You must have long-range goals to keep you from being frustrated by short-range failures.” — Charles C. Noble
Setbacks can be useful, even essential, to keep you grounded. Setbacks provide opportunities to release pent-up ego, overconfidence, arrogance, anticipation and other anxieties. They allow for resetting objectives, priorities, and direction, as and if needed. Setbacks reduce fragility and increase robustness. In fact, it is largely better if one faces setbacks earlier in their journeys than later.
The longer a forest goes without forest fires, the bigger the eventual fire. That is why forest rangers sometimes start Burn small, controlled fires.
The longer the stock market keeps going up (the bulls dominate), the bigger, deeper and quicker the eventual fall (the louder the bears roar).
In the last one week, my stock portfolio fell by fifteen percent but that hardly made me flinch. I remember days when even 3–4% fall would make nervous, even when I knew that such (and even deeper) falls are totally par for the course. But experience with many such falls, made me much better at handling them.
It is important to remember that setbacks can be useful only when they are not big enough to knock you out of the game. It follows that it is critical that you engage in only those pursuits, the worst possible outcomes of which, you are OK to live with.
Bottomline
“A stumble may prevent a fall.” — Unknown
Setbacks are not always valuable because they give you lessons on how to do things better — for, not all setbacks contain any lessons except perhaps that you are down on your luck. Setbacks are valuable because they make you resilient and tolerant. The value from setbacks can be best appropriated by working through them as opposed to getting overwhelmed or demotivated when you face them.
***************************
Thanks for taking time to read this article. In this newsletter, I share my learnings that could help you improve your decisions and make meaningful progress on your goals. I try to share stuff that I have personally experienced or experimented with.
To follow me on LinkedIn, click here
