How Losing Money Can Make You Rich

Published in Investing on 11 April 2012

You learn more from your investment mistakes than your successes.

Nobody likes losing money. That's one of the few things that can be safely said about almost every single human being on the planet.

Losing money is no fun. All of us avoid it whenever we can, though every investor knows that at some point, they will lose money.

And it will hurt.

Love to lose

Yet losing money can be good for you. By teaching you a painful lesson, it can make you a better investor. In fact, I would go further still:

Losing money is the best lesson of all. Losing money can make you rich.

This occurred to me recently while reading The Psychology of Wealth by Charles Richards. He quotes Walt Disney himself, saying: "You may not realise it when it happens, but a kick in the teeth may be the best thing in the world for you."

Adversity can make you strong. That's a very Disney message.

I hope I'm right about this, because I've taken a few kicks along the way. But here are five ways losing money has made me a better investor.

1. Check for every charge

Even as a financially naive 20-something-year-old, I was never one to take financial advice. So when I realised it was time to take out a personal pension in the late 1990s, I shunned IFAs. I wasn't handing any of my hard-earned money to them.

So I took out a pension with mutual insurer Equitable Life, which boasted that it didn't pay money to IFAs either.

I lazily assumed that because Equitable Life didn't pay money to IFAs, its charges would be great value. But its own advisers were very-nicely remunerated. From my pocket.

This taught me an important lesson. Before buying any investment, unpick all the charges.

As you can imagine, it wasn't the only lesson Equitable Life taught me.

2. Don't trust guarantees

Equitable Life was destroyed by its decision to offer fantastically generous guaranteed annuity rates. Typically, a £100,000 pension would deliver £12,000 a year annuity income (today you would be lucky to get £5,000).

That looked affordable when interest rates were sky-high in the 1970s, but plain crazy when interest rates tumbled at the turn of the millennium. It killed the company.

I lost money, but nowhere near as much as most of its 800,000 angry customers.

When you're investing, nothing is guaranteed. If you go looking for a guarantee, you will eventually find that there is a catch -- and, one day, it will be triggered.

3. This is for real

If you dropped your wallet in the street and it contained £500, it would ruin your day. So far this year, I've lost £600 on gold mining stock Vatukoula Gold Mines (LSE: VGM) alone, without complaint.

In recent times I've lost thousands of pounds on Barclays (LSE: BARC), Lloyds TSB (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS), even though I bought a year or two after the banking crisis. For some reason, it doesn't hurt as much as dropping the same amount of cash in the street. After all, it's just numbers on a screen, not paper in your wallet. But the impact on your wealth is exactly the same.

You're playing with real money. You need to take care of it.

4. Patience is now my virtue

When I started investing, I bought something and if it didn't budge for a month or two, I ditched it. I've lost count of the go-go stocks that took off soon after I lost patience with them, but tech soaraway ARM Holdings (LSE: ARM) is the one that sticks in my craw.

That would have been my one and only four-bagger, if I hadn't dumped it.

My average investment hold has now leapt from two months to several years, and is still rising. Before, I was gambling. Now, I'm investing for the long-term. I'm buying on the dips, and yearning for the yield.

You could call it slow investing. In today's crazy market, it feels right.

5. Greed isn't good

Being a better person can make you a better investor. It's true. When I started investing, I was lazy (see point 1), I was stupid (point 3) and I was greedy (point 4).

How did that work out for me? Not very well.

Over the years, I've been ironing out my bad habits. There's a long way to go, but progress has been made. Make sure you're working on your bad habits, too.

Now if only being a better investor made you a better person...

Don't learn from me, learn from him

Warren Buffett famously said: "The first rule of investing is, don't lose money; the second rule is, don't forget rule number one." As you can see, I have broken both rules repeatedly (and plenty more besides).

I'm not an investment genius, like Mr Buffett. So maybe I needed to break those rules to learn how to do things better.

I haven't learned so much from my winners -- I just banked the money and moved on. But I've learned a lot from the losers.

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More from Harvey Jones:

> Harvey owns shares in RBS.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

goodlifer 11 Apr 2012 , 11:49am

"After all, it's just numbers on a screen, not paper in your wallet. But the impact on your wealth is exactly the same."

Not true, surely.
Numbers on a screen are just moonshine, as transient as wind or running water.
There's no impact on your wealth - up or down - unless/until you actually turn those numbers into real money.

imacifm 12 Apr 2012 , 1:34pm

Good article Harvey. But - how long can you be patient? For example, I am sure that precious metal equities must rise - but how long is the term? Because, in the long term...well, you know...

Ian

goodlifer 13 Apr 2012 , 9:06am

imacifm

"How long can you be patient?"
Depends on your time horizon, which nobody can decide except you.

FWIW, mine's for ever.
I may not last more than 10-20 years myself - I'm 84 - but it's on the cards I may be outlived by one or two members of my family.

Possak 21 Apr 2012 , 11:30pm

I think a better answer to the issue of this being for real is that there's a reasonable future chance of recouping investment losses if you don't need to eat into capital any time soon. If you lose your wallet, there isn't.

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