Letter to A Young Investor #20: You Can Invest. But How Much Can You Suffer?

Two Books. One Purpose. A Better Life.

“This is a masterpiece.”

—Morgan Housel, Author, Psychology of Money

“Discover the extraordinary within.”

—Manish Chokhani, Director, Enam Holdings

I am writing this series of letters on the art of investing, addressed to a young investor, with the aim to provide timeless wisdom and practical advice that helped me when I was starting out. My goal is to help young investors navigate the complexities of the financial world, avoid misinformation, and harness the power of compounding by starting early with the right principles and actions. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.

Dear Young Investor,

I have a friend who’s a brain surgeon. He often shares stories of his patients and how he deals with the complex decisions surgery demands. And not just technical skill, but the psychological weight of holding someone’s future in your hands.

When we met last week, he told me about a fifty-two-year-old school teacher, who came in with a tumour pressing against her speech centre. Her words had started slurring. She’d forget simple nouns mid-sentence. “Table” became “that thing.” “Book” became “you know, for reading.” Without surgery, she’d lose speech entirely within months. With surgery, there was a chance, but also a 15% risk she’d wake up unable to form words at all.

“I was two millimetres from the speech area,” my friend said, holding his thumb and forefinger barely apart. “The monitor showed her brain activity. One wrong move and I’d see the speech patterns just… disappear from the screen. Permanently.”

He paused. “I’ve done this operation sixty times. I know the anatomy better than I know my own home. My success rate is 93%. But standing there, my hand was shaking. I could feel a tremor. Only I could feel it.”

The surgery took seven hours. The woman woke up and asked for water. Three days later, she was reading to her grandchildren.

“Here’s what haunts me,” he continued. “I have a colleague, same training, same experience, maybe even better technical skills than me. His hands never shake. Not even slightly. He can operate in that danger zone with the steadiness of someone chopping vegetables. We’re both good surgeons, but we have different nervous systems.”

He looked at me. “And you know what the scary part is? It’s the surgeons whose hands shake but who don’t realise it. They don’t know their own limits. That’s when patients get hurt.”

As I do with a lot of my interactions, I related what he told me to how most of us behave in our much simpler role as investors. We believe we understand our risk tolerance until the market actually falls. We have read Graham and Fisher, Buffett and Munger, and Marks and Mouboussin, we know the statistics, and can recite that stocks always recover eventually. But when our portfolio drops 30% and stays there for even a few weeks, forget months, something happens in our bodies that no amount of reading can prepare us for.

I have seen how bad markets affect people’s behaviour with their spouses and kids. I know people who are not able to sleep peacefully at night as they keep doing the mental math on what they’ve lost.

This gap between what you think you can handle and what your nervous system can actually tolerate is what I call your pain threshold. Where you fall on that threshold, whether you’re a 2 or an 8, defines how you should invest.

This spectrum is simply a measure of how wide the gap is between your intellectual understanding that market crashes are temporary and your emotional experience of watching your wealth evaporate.

On one end of the spectrum sits someone like, say, Warren Buffett, who could watch his portfolio drop 50% with the same equanimity as checking the weather. His nervous system simply doesn’t fire distress signals when numbers on a screen change.

On the other end sits an investor who panics at a 10% correction, sells everything, and can’t bring themselves to get back in.

Most of us fall somewhere in the middle, and that middle is far more crowded than the investment literature would have you believe.

Now, what’s fascinating about this spectrum is that your position on it has almost nothing to do with intelligence. I’ve known brilliant engineers and doctors who could explain the mathematical basis for long-term equity returns but who became completely paralysed during market crashes. I’ve also known people with modest formal education who sailed through the 2008 or 2020 crisis without losing sleep.

The difference isn’t IQ or knowledge, which is what most of us think it is. It’s something more fundamental about how your nervous system is wired and what your life circumstances allow you to endure.

Just as my doctor friend’s hand trembled despite his knowledge and skill, your finger might hover over the sell button despite knowing intellectually that you shouldn’t press it.

How to Find Your Actual Breaking Point

Finding your place on this spectrum requires more than thought experiments. When I ask people to imagine their portfolio dropping 50%, they almost always overestimate their tolerance. It’s because the imagination is a poor simulator of actual stress. Instead, you need to look at your actual behaviour during past market declines.

You may not have been investing during the last major market capitulation that happened in 2008, but think back to March 2020 when markets fell 35% in six weeks, and hundreds of stocks fell even more:

Did you sell anything, even a small holding “just to feel better”?
How many times per day did you check your portfolio?
Could you concentrate on work, or were you constantly refreshing market websites?
Did you sleep well, or were you lying awake thinking about worst-case scenarios?
Were you irritated with family members for reasons you couldn’t explain?

Think about any of these behaviours you indulged in then, because they are data points that tell a lot about where your breaking point actually lies.

Your portfolio-checking frequency, the quality of your sleep, and your emotional state are akin to the trembling hands of a brain surgeon performing a complex surgery.

Your body knows before your mind admits it. During the next correction, pay attention to physical signals. When you open your online portfolio tracker, does your heart rate increase? Do you feel a knot in your stomach?

If a 20% decline produces these responses, then regardless of what investment books tell you about staying the course, 20% is approaching your functional limit. Push beyond that limit and you risk making catastrophic decisions at the worst possible moment.

It’s A Moving Target

Now, what makes this even more complex is that your position on the spectrum isn’t fixed. Consider two investors, both claiming they can rationally handle 50% losses:

Investor A: Twenty-five years old, stable job, no dependents, parents as safety net
Investor B: Fifty years old, daughter’s college tuition due next year, aging parents

Who’s more likely telling the truth about their tolerance? Even if both have identical intellectual understanding of market cycles, their life circumstances create completely different stress profiles.

For Investor B, that 50% loss isn’t just a number on a screen, but his daughter’s education, his parents’ medical care, and his retirement timeline collapsing. His nervous system knows this even if his rational mind insists he should stay calm.

Your rationality threshold shifts with:

Age and time horizon (closer to needing the money = lower tolerance)
Absolute wealth level (losing 50% of ₹50 lakh vs ₹1 crore vs ₹10 crore)
Job security (stable job vs startup stock options)
Dependents and obligations (single vs supporting family)
Health and energy levels (bouncing back at 30 vs 60)
Previous experience (survived 2008, 2020 without selling vs first real crash)

A brain surgeon’s steadiness in the operating room changes depending on their experience levels, how much sleep they’d had, whether it was their first surgery of the day or fifth, and even whether the patient reminded them of someone they loved. Your investment rationality works the same way. It’s not a fixed trait but a dynamic response to circumstances.

Two Paths Forward

Once you honestly assess where you stand—let’s say you can handle about 25% losses before your behaviour starts deteriorating—you face a choice. But what’s interesting here is that neither path is obviously correct, and the right answer might change over time.

1. Portfolio Design: If 25% is your limit, you need enough bonds, debt funds, gold, or cash that a severe equity bear market never pushes your total portfolio beyond that threshold. This might mean holding 40-50% in non-equity assets. Your long-term returns will absolutely be lower than pure equity. But if the alternative is panicking and selling everything at a 30% loss, then the “lower-return” portfolio is actually the higher-return strategy for you personally.

2. Raising Your Tolerance: This isn’t about forcing yourself to endure more pain. It’s about restructuring how you relate to losses. Some investors find that having a small “fun money” (I call it “sin money”) allocation they can trade actively gives them an emotional release valve that lets them hold their core portfolio steady. Others discover that checking their portfolio monthly instead of daily eliminates most of the emotional turbulence. Still others find that deeply understanding the businesses they own creates conviction that outlasts price volatility.

But the question here is whether you should even try to increase your tolerance? Maybe your nervous system is giving you accurate information about real risks in your situation. Maybe the voice telling you to be more cautious isn’t irrational fear but appropriate prudence given your circumstances.

You’re No Warren Buffett

I’ve been an investment teacher for 15 years now, and for most of those years, I’ve quoted Warren Buffett religiously in my writing and teaching. It’s important to learn the big ideas from him, for he’s arguably the greatest investor who ever lived, and his principles about business quality, margin of safety, and long-term thinking are invaluable. But one big lesson I’ve learned over time is that there’s a dangerous myth in investment education that everyone should aspire to be Warren Buffett, not just learn from him.

Yes, Buffett’s extreme rationality allowed him to generate extraordinary returns. But very few humans are wired like him—or even, say, like Rakesh Jhunjhunwala or RK Damani—and pretending you are when you’re not sets you up for big mistakes.

An investor who knows they’re a six out of ten on the rationality spectrum and builds a portfolio accordingly will almost certainly outperform someone who believes they’re a ten but is actually a five and keeps making emotional decisions at exactly the wrong moments.

My doctor friend tells me about surgeons who specialised in safer procedures because they knew their hands would never be completely steady on the riskiest operations. They saved lives differently but no less meaningfully. Then again, some surgeons trained themselves past that tremor and could operate where others couldn’t.

So, it’s worthwhile sitting with some questions when it comes to the kind of investor you are, and your place on the rationality spectrum:

What does your body actually tell you when markets fall, not what you think you should feel?
Is your current portfolio design honest about those limits, or are you pretending to be more rational than you are?
If you’re limiting your equity exposure to protect yourself, are you protecting a permanent trait or avoiding necessary growth?
Could you handle 50% losses if you checked your portfolio monthly instead of daily?
Would understanding the underlying businesses change your experience of price declines?
Are you honouring your limitations or hiding behind them?

The question isn’t whether you can handle 50% losses. The question is: what does your body tell you when you honestly simulate that experience? And then the harder question: should you listen to that voice, or should you try to change it?

Think. Don’t just answer yet, but think.

Warmly,
Vishal

Two Books. One Purpose. A Better Life.

“This is a masterpiece.”

—Morgan Housel, Author, Psychology of Money

“Discover the extraordinary within.”

—Manish Chokhani, Director, Enam Holdings

Disclaimer: This article is published as part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund. All Mutual fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (‘RMF’). For more info on KYC, RMF & procedure to lodge/ redress any complaints, visit dspim.com/IEID. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Also Read:

Two Books. One Purpose. A Better Life.

How to Find Your Actual Breaking Point

It’s A Moving Target

Two Paths Forward

You’re No Warren Buffett

Two Books. One Purpose. A Better Life.

Join 90000+ Smart Investors

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