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Rupert Hargreaves
Rupert Hargreaves
Articles (1451)  | Author's Website |

Losing Money the Right Way

Some thoughts on the perils of investing

June 25, 2019

One of the best and easiest to learn lessons in investing is how to lose money.
Losing money is virtually guaranteed in investing, but it is not how you lose money that matters; it's what you do afterward that is the most crucial part.

Unavoidable

Even the world's best investors cannot avoid losing investments. It is just part of the game. Sometimes we don't have all of the information available to us, and sometimes there may be factors outside of our control that change a situation from a profitable one into a loss-making one almost overnight.

The fact the matter is, sometimes it is just impossible to avoid losing money, no matter how hard you try.

Concentrate on risk

Focusing on risk reduction should be at the core of every investment strategy. If you focus on risk first and returns second, you should achieve a positive investment result over the long term. I can guarantee, however, that every investor will have to deal with a total loss at some point in their career.

Dealing with this loss correctly is critical for long-term investment success. Without a doubt, the best approach by far is to cut your losses, understand what went wrong and move on. The worst thing you can do is try to take revenge on the market, averaging down and making the same mistake again and again.

Losing money also gives you great insight into your own investment mentality. If you cannot handle losing money, you are going to have a hard time investing. A better strategy is probably to buy a low-cost index fund and leave it at that.

Learning how to lose money without putting your entire investment strategy at risk is critical when investing in single stocks. As I've said before, you are going to run into a situation where you suffer permanent capital impairment at some point, so it is essential to make sure you are prepared when it happens.

It pays to be prepared

Herein lies another lesson from losing money: how to be prepared. If you've been investing for 10 years or more, you've probably experienced the slow decline of a company, from a market success story to a basket case.

There are thousands of examples of this playing out. A once-hot stock that could do no wrong in the eyes of Wall Street slowly starts to struggle, the share price languishes and investors start to desert the business. I like to call this the death spiral.

Once the decline begins, most companies just can't make a comeback. And while these shares might look cheap compared to history and compared to the underlying fundamentals, the stock never makes a recovery. This is partly because the valuation reflects what has been, not what the future holds, and partly because once the stock has lost the confidence of the market, it is tough to regain it.

Dealing with this death spiral and knowing when to give up on a business is another required quality to be a successful investor over the long term.

Conclusion

My purpose in this discussion was to explore some of my thoughts surrounding losses and why I believe losing money is probably the most crucial experience investors can learn from.
As I've tried to explain above, losing money can teach you a considerable amount about how to invest and how you act as an investor, as well as whether or not you are comfortable seeing the value of your investments decline.

To put it simply, no matter how much time and effort you put in to try to avoid losing money, there's never an ironclad guarantee you will be able to prevent a loss. The key is to make sure that when you do have to take a loss, the impact on your overall wealth is limited and you can get back up and move on.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


Rating: 5.0/5 (2 votes)

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Comments

jtdaniel
Jtdaniel - 1 year ago    Report SPAM

Hi Rupert,

Excellent discussion of a difficult topic. I have found that averaging down can be the best or worst move, depending on the circumstances of a stock’s price decline and the quality of the underlying business. Probably my worst investing decision was to average down on Radio Shack in 2011. I never should have considered buying Radio Shack because it appeared to be a Grahamian “bargain” and that is not my game. That was my last deep value purchase of a low quality stock, but if I ever make another I will not average down. I bought CVS stock just before it announced the agreement to purchase (overpay for) Aetna. I held, but jettisoned any thoughts of averaging down despite the lure of a lower per-share price. On the other hand, averaging down into stocks including Microsoft, Amex and Starbucks has worked out nicely, Best, dj

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