Even Warren Buffett Loses Money
With the markets increasingly volatile, and the economy behaving in unprecedented ways, I wanted to revisit a past Money & Crisis for an important reason.
This lesson can save you a lot of grief while trying to make money in the current financial climate.
Let’s get started…
I was recently re-watching Floyd Mayweather, Jr.’s schooling of Canelo Álvarez.
At the time of the boxing match in 2013, Mayweather was already in the twilight of his career. At age 35, he had already won all 44 of his professional fights.
His opponent, the then-undefeated Mexican Champion Canelo Álvarez was 12 years younger, aged 23, and rising in both skill and boxing knowledge.
There was significant media hype surrounding the fight – it was to determine “The One” boxer who would be the biggest name in boxing. Either Mayweather would retain his crown as the pound-for-pound champ while he rode off into the sunset, or Álvarez would overtake him as the new champion and “face of boxing,” kicking off a new era for the sport.
What followed was one of the most lopsided fights in history. The younger, larger, and stronger fighter was made to look like an amateur. It’s difficult to find a single minute that Álvarez was winning, let alone a single round. Thanks to his unparalleled defensive skills, Mayweather made Álvarez miss nearly FOUR out of every five punches he took.
All told, Álvarez landed a mere 117 punches out of 526.
Of course, I bring this up for an important reason:
There’s a major lesson for us as investors/traders here.
How to Beat the Markets in the Ring
Even in a lopsided fight – in which a defensive master made his opponent swing and miss nearly four of our every five punches – his opponent still landed 117 punches.
Put another way, even when you’re talking about the greatest defensive fighter in 30 years putting on one of his greatest performances in the ring, you’re still talking about a guy who was hit 117 times… or nearly 10 times per boxing round… or roughly once every 18 seconds.
If you want to be a boxer, you’re going to get hit and you’re going to experience pain – even if you’re the best of the best.
The same is true for losing money as an investor. No matter how talented you are, you’re going to lose money at some point. And sometimes, you’re going to lose a LOT.
Every single investing legend you’ve ever heard of (Warren Buffett, George Soros, Stanley Druckenmiller, etc.) has lost millions and sometimes even BILLIONS of dollars on bad investments.
Heck, Buffett himself has lost so much money buying airlines that he often jokes that anytime he even starts to think about buying an airline, he calls his business partner for an intervention.
Again, all investors, ranging from novices to the investing legends, lose money at times. The thing that distinguishes the legends from those who go broke is that over time, the legends’ winners far outnumber and outweigh their losses.
The “Anxious” Rule for Confident Investing
If you’re new to investing or trading, the key to your success is to use a strategy that ensures that your losses will be minimal until you are more skilled/comfortable with the markets.
Put another way, you need to make sure that your losses are NEVER large enough to stop you from becoming successful.
That means using CAREFUL position sizing with your investments/trades.
Some traders like to use percentage rules to limit their positions, e.g. “I never put more than 10% of my total portfolio in any single position.”
Others like to limit positions using their maximum allowable loss, “I will never lose more than 1% of my portfolio on a loser, so if I put 20% of my portfolio into a single stock, that means that if the stock falls 10% I immediately sell.”
If you’re really new to investing, I wouldn’t bother being so technical. Instead, I’d use what I call the “anxious” rule:
If a position is large enough that I’m anxious about it… IT’S TOO BIG.
Your positions should be small enough that you don’t feel the need to check on the market every single minute. If you find that you’re getting anxious and checking the screen so often that you can’t even focus on something else for a few minutes, the position is too large.
Don’t Let a Losing Trade Knock You Out
If you’re just starting out, don’t worry about getting rich. You’ll do that once you’ve developed your trading strategy/comfort level with the markets.
For now, keep your positions small as you practice – much like a boxer works on the mitts or heavy bag before he or she actually gets in the ring with a real live opponent.
The goal here is to ensure your losses are small enough that you don’t lose enthusiasm or become too emotional with your trading.
Remember: Everyone, even Warren Buffett, has lost money. The key is to ensure your discipline is great enough that in the long term your winners far outweigh your losers.
That means keeping your positions small enough that you’re never anxious when you first start out. Because just like a boxer, no matter how skilled you are, everyone ends up getting punched.
The key is making sure they don’t leave you knocked out.
Editor, Money & Crisis