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Of Exercise, Injuries, and Markets.

It's supposed to hurt when you exercise. Or at least afterwards. That's the sign that you've had a "good" workout, one that stretches, and ultimately expands your capabilities.

It also hurts when you've been injured. That's a bad sort of "hurt" that says that something is not right with your system. It's the kind of pain that you want to remove, and specifically, by fixing the underlying cause, not just by applying painkiller.

The financial markets sometimes work like that, specifically by going against you (usually down), and causing a certain amount of pain. Sometimes it's "exercise," and you should take the opportunity to buy more stock at a cheaper price. Sometimes it's "injury," and you should get out, because your first loss is your best loss.

The market pullbacks of the 1980s and 1990s were mostly of the "exercise" variety. People then learned to "buy more on dips" and rightly so (at the time). But the market retreats of the past (lost) decade have mostly been of the "injury" variety. Investors got hurt because companies couldn't live up to the unreasonable expectations embedded in the stock prices. This often represented what Ben Graham and Warren Buffet referred to as a "permanent loss of capital," which is clearly an injury.

So sometimes you should step on the gas when it "hurts." Sometimes you should slam on the brakes. Being able to tell the difference between exercise and injury is one hallmark of wisdom.