Every year on the stock exchange, billions of dollars are made and that is where you hope to be on the side of, but billions are dollars are lost by the same smart people that made billions. What can you learn from the losses? In the movie, Wolf of Wall Street, the Leo DiCaprio character makes a terrific sales call. He says judge me not by my gains but my losses. (if you never seen the movie, there is a clip of the sales call on You Tube). The character goes on in the movie to miss the point the client should have the gains not just the stockbroker. The point is all investors will have losses in their portfolio, the issue is what did the investor learn from the losses. Remarkably few people invest to make a loss, for at some point there tends to be a gain, but losses do happen.

In an article by Sam Sivarajan, offers some ideas of how to learn from losses to limit them.

Beware Hubris

The world’s biggest bankruptcy was in office space rentals. Masayoshi Son, founder of Softbank, made a nearly $50 billion bet on the future of WeWork office space. The company went into bankruptcy because of its business model – how did it make money? The lost cost Softbank over $11.5 billion in equity loss and $2.2 in debts.

Aswath Damodaran, a professor of valuation at New York’s Stern School of Business asks, You can recover from mistakes, but how do you recover from the perception you don’t know what you are doing?

Overconfidence is one of the deadliest sins for an investor. If you have high trading levels, which is good for the firm you trade with, does it translate to higher returns? In a study of 300 professional fund managers 74% said they delivered above-average returns, 26% were average. No one said they were below average, but you will find many funds delivering less than the S&P 500 Index?

Herd Hysteria

In the world of crypto currencies investors in FTX lost money as it went bankrupt. The art NFT which were big hits in 2021-22, 95% are worthless. Billions of dollars evaporated. When both were going up in price, there was great media attention.

Lessons

What do you own and why?  – what has to go right to make you money? what can go wrong to lose money? Peter Lynch of Fidelity Investments said Know what you own and why you own it. 

If you do and something changes, you can possibly make changes.

What is your track record? – over the past 5 years how have your picks done? if your brokerage account is similar to mine, there are multiple charts to determine how you are doing. Has your portfolio performed the way you thought it was going to? what would be different in 2024? if you have not beaten the S&P 500 Index – why do you not own the index?

How much can you afford to lose when you are wrong? most of us buy stock expecting it to rise in value, but what if it turns out to be a loss. Some of the reason could be the market does not appreciate your decision; the markets in general were affected by world events; the growth of the company is not happening; how long would you hold on to it? to paraphrase Warren Buffet – when the tide went out were you caught swimming naked?

Linking to dividend paying stocks, most people come to dividend paying stocks in their portfolio after losing money or chasing growth stocks. Dividend stocks tend not to fall as much when the markets fall because they pay a dividend and the yield go up; when the market is up, they tend to trade at higher multiples but not as high as growth stocks. For dividend stocks, if you pick ones that can pay every year, over time the total return tends to be higher for losses are much lower. Money will be lost in 2024, hopefully it is not yours.

There are more questions than answers, till the next time – to raising questions.