No matter how good you are, you're going to lose money investing in stocks.
Nobody likes to lose money. In fact, people go to extraordinary lengths to avoid investing losses. But stocks don't always go up, and from time to time, ugly markets make it almost impossible to show profits from your stock positions.
When the Oracle's wrong
If you've felt lately like you can't catch a break with your stocks, it's comforting to realize that you're not the only one seeing red ink on your portfolio screen. Even Warren Buffett has posted hefty recent losses.
- Buffett's financial stocks certainly haven't done him any favors in the past year. Moody's (NYSE: MCO ) is down nearly 40%, and American Express (NYSE: AXP ) has seen its stock price fall almost 20% in the past year.
- Several other investments he's made, including long-term holdings Washington Post (NYSE: WPO ) and USG (NYSE: USG ) , are also lagging badly.
- Overall, Berkshire shares have lost close to 18% of their value since December.
Yet from a long-term perspective, calling Buffett a big loser is ridiculous. While he's made mistakes -- and he'd be the first to admit them -- Buffett knows that you can't judge performance from a single year.
Even over the past 10 years -- hardly the pinnacle of the Oracle of Omaha's success -- Berkshire stock has risen at a 5.7% annual clip, compared to the S&P 500's 3.8% average return. Add to that the lower volatility of Buffett's returns -- investors missed out on some of the tech bull market, but avoided a lot of the pain when that bubble burst -- and you can see that patience has rewarded long-term Berkshire shareholders.
Similarly, just because you'll be a loser sometimes doesn't mean you can't be a winning investor overall. You just have to recognize that things won't always go your way -- and try to avoid making mistakes that will compound your losses.
Make the most of losses
It's hard to see losing money as an opportunity. Ideally, you could buy shares at the bottom every time. But since you can't time the market exactly, you need a strategy in place to handle your losers:
- Know whether you want more shares. Doubling down or dollar-cost averaging into a position can work out very well if shares fall after your initial purchase. But to avoid letting emotion get the better of you, it's best to make that decision when you first buy your stock.
- Stay informed. If your stocks are falling, make sure you know why. Are they just following the market lower, or is there some specific reason why your particular companies are doing badly? Overlooking permanent problems with your holdings can cost you -- just ask those who held onto their Bear Stearns (NYSE: BSC ) or Enron shares until the bitter end.
- Get a silver lining. Remember, you can get a tax break from your investment losses if you sell. Although you shouldn't make taxes the sole reason for your decision, they can help you get a little bit back from a bad pick.
You're not alone
If recent losses have taken away all your investing confidence, don't panic. Millions of other losers are in exactly the same boat. As long as you stick with a well-considered investment plan to reach your financial goals, you'll be a winner in the long run.
For more on Buffett and the basics of investing, read about: