For many world-famous value investors, their interest in the field can be traced back to Warren Buffett.

In 1982, Thomas Russo was a business student at Stanford University when he attended Buffett’s talk. He was simply dazzled by the speed of Buffett’s mind and his knack for weaving profound investing lessons with stories and rib-tickling quotes. Russo was hooked for life and chose to pursue a career in value investing.

Today, Tom Russo is a pre-eminent value investor of our times who manages over US$ 12 billion as a partner at Gardner Russo & Gardner. The most important idea that Russo talks about wherever he goes is capacity to suffer.

Capacity to suffer is closely connected with the idea of delayed gratification. Delayed gratification happens when someone resists the temptation of an immediate reward in preference for a later reward. Delayed gratification is associated with resisting a smaller but more immediate gain in order to receive a larger or more enduring reward later.

In the famous
Marshmallow Experiment, social scientists reached the conclusion that the kids who had the temperament to patiently wait on an easily accessible marshmallow so that they could enjoy two marshmallows later, tend to fare better in life as compared to those kids who couldn’t control their urge and grabbed the one marshmallow.

You can easily replace “marshmallow” with “money” in the experiment and the context won’t change. Often, putting off pleasure ‘in the now’ is the difference between failure and success over the long term. The ability to delay gratification is one quality that consistently separates the most successful ones from the not so successful ones.

We tend to benefit in life, says Russo, “when we sacrifice something today to gain something tomorrow. That is true for companies and that is true for individuals.”

When you invest money to extend a business into new geographies or adjacent brands or into other areas, you typically don’t get an early return on this. That means the business has the capacity to suffer.

Russo’s focus is on businesses that can delay the gratification, i.e., they have the capacity to suffer. A business that has the capacity to suffer can continue to reinvest their returns at high rates of return. Such businesses forego the opportunity to take a short-term profit, i.e., suffer in the short term, in favour of investing for the long term, and have the wherewithal to do that year after year even in the bad years.

Looking for the capacity to suffer in a business is nothing but looking for the margin of safety. Russo says that in Benjamin Graham’s way of value investing, a margin of safety meant paying less than the intrinsic value which in turn was derived from the liquidation value of the business.

In the new school of value investing, the margin of safety is closely connected to the competitive advantage a business enjoys. A durable competitive advantage is the source of capacity to suffer.

For example, Warren Buffett’s Berkshire Hathaway owns an insurance company called GEICO. It sells vehicle insurance direct to the consumer. When they sell to a new customer, for the first year GEICO loses US$ 250 on that policy.

However, by offering great services and ensuring that the customer remains a customer in future, they make an average profit of US$ 150 per year over the lifetime of the policy.

The burden of losing money in the first year for the new customer is the capacity to suffer that GEICO has. But it can afford that only because of its competitive advantage that ensures profits in subsequent years.

Capacity to suffer is also about not doing things which are easy to do but shouldn’t be done in view of the long term. Russo talks about the example of Phillip Morris which is a cigarette company.

When e-cigarettes were invented a lot of cigarette companies wanted to ride the wave. But Phillip Morris found that the e-cigarette technology didn’t offer any more safety as compared to conventional cigarettes. So, they chose to not invest in that business.

Leaving money on the table when everyone around is grabbing their share is something which can only be practiced by those who have capacity to suffer and endure.

Russo believes that consumer brands – like Nestle which is Russo’s biggest holding – typically have a great capacity to suffer. Capacity to suffer is deeply rooted in Nestle’s DNA. In the context of Nestle, capacity to suffer offers two advantages.

First, it gives you the option to continue to reinvest in those areas which hold huge future potential even though they might look like loss-making proposition in the initial period. Nespresso is a great example of this. For 25 years, Nespresso was a product in Nestle’s portfolio which wasn’t profitable. But Nestle’s management looked at it as a bet that had future potential and needed patience and reinvestment.

Today, Nespresso creates more than $4 billion business for Nestle. Nestle’s management believed in Nespresso and continued to experiment and refine Nespresso for a long time.

The second advantage of capacity to suffer is that it gives you the ability to patiently ride out the occasional bad times that luck hands you. In 2015, Nestle went through a tough period in India when its Maggi Noodles had to be taken off the shelves for almost a year because of quality concerns. Nestle and Maggi both survived precisely because Nestle had the capacity to wait.

Apart from the businesses that own brands, there’s another class of businesses that can afford the capacity to suffer because they have the low-cost advantage.

Jeff Bezos is the living and breathing example of how a management’s focus on delayed gratification and capacity to suffer can create a company worth more than $700 billion in less than 25 years. For first two decades, Bezos kept ploughing back all the cash profits back into Amazon’s growth.

He never bothered that Amazon wasn’t showing profits on the paper. He knew that Amazon’s cash flows were consistently positive. He understood the futility of pleasing the Wall Street. In 1997, he wrote this in his first annual letter to shareholders –

We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions. When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.

In case of Amazon, the capacity to suffer (and willing to delay the gratification that comes from showing huge accounting profits on the financial statements) gives the option to invest in experiments which can fail. Kindle and Amazon Web Services (the biggest cash cow for Amazon) are two such experiments among hundreds of other failed ones.

A long-term focus goes a long way in establishing the capacity to suffer. Because Bezos was not worried about showing quarterly or even yearly profits (even though his operations were brilliantly cash positive) he could make bold decisions for investing for the future growth. He wrote –

We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, other will not, and we will have learned another valuable lesson in either case.

Remember Amazon’s Fire-phone? Heard of Amazon auctions? Those were the bold ideas that never saw the day of light. Amazon’s capacity to suffer absorbed those bets.

When you think deeply about insights from Amazon’s fanaticism for delayed gratification, you’d realize that capacity to suffer isn’t just about riding out the bad times.

It’s also about turning those periods of suffering into an edge, an advantage over other. Because in case of Bezos, to a large extent it seems his suffering is self-inflicted. In that sense, one could say that having the capacity to suffer is truly an antifragile strategy.

The idea of capacity to suffer applies equally well to individual investors too.

What gives you the capacity to suffer? To answer that, let’s look at the factors that are enemy of the suffering capacity –

1. The first is leverage or debt. In the event of a market crash or even a small correction, the thing that sends chills down the spine of a leveraged investor is the fear of margin calls from the broker.

Nothing can be more painful than being forced to sell your best stocks just because of temporary volatility. In fact, this is the time when an investor should be accumulating more of the best businesses that he already has in his portfolio.

Alternatively, if you are so indebted – a large part of your disposable income goes towards EMIs – that you don’t have the capacity to withstand any loss of income that also accompanies your stocks going down. Using your own money which you will not need for next 5-10 years is the first source of capacity to suffer for an investor.

2. Lack of temperament or emotional stability to bear the pain of seeing your stocks going down (with or without the market). Please don’t invest in stocks directly if you don’t have this capacity, or you’ll just be fooling around with your time, money, and peace of mind.

3. If you’re managing other people’s money and thus also managing their expectations. In a prolonged bear market or a prolonged period when you are not asking them to act, they may ask you to liquidate against your wish.

And like in business, for individual investor too, capacity to suffer pertains also to the ability to say no when everyone around is saying yes.

During rising markets, as has broadly been the case for past few years, it takes a tremendous amount of patience and capacity to suffer in order to maintain the value investing discipline.

Watching others make easy money is nothing less than a suffering. It’s real – the suffering caused by the feeling that one is missing out. But it doesn’t last forever.

From 1995 to 1999, legendary value investor Seth Klarman’s Boupost group posted a CAGR of 8.7 percent as compared to the 28.5 percent shown by S&P 500. But that didn’t deter Klarman. He stuck to his guns and his value investing principles. He had the capacity to suffer in the short-run.

Klarman has compounded money at an annual rate of more than 20 percent whereas the world knows what happened to S&P 500 and the broader markets after 1999.

Famous 18th-century philosopher Jeremy Bentham once observed –

The question is not, Can they reason?, nor Can they talk? but, Can they suffer?

If you can suffer amidst the trials that Mr. Market may force upon you from time to time, you guarantee yourself an investing life peacefully lived.

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