3 Vital Things for Investors to Remember About Losing

Check out all our earnings call transcripts.

If you're looking for a strategy that will produce market-beating stock returns, you could do a lot worse than to follow the guidance of Motley Fool co-founder David Gardner. His Rule Breakers and Stock Advisor portfolios have both handily outperformed their benchmarks over the long term -- and usually the medium term, too. But here's the thing: If you're investing in the sorts of stocks that have the potential to be big winners, you are absolutely guaranteed to pick up some clunkers, too.

That's why, in this segment from the Rule Breaker Investing podcast, Gardner wants to offer a few important things for investors to keep in mind as they manage their portfolios. Because stocks that go down are a fact of life, and you can't win over the long haul if you don't adapt to it.

A full transcript follows the video.

This video was recorded on Jan. 16, 2019.

David Gardner: Before I go into those six picks, I have three primary points I like to make up front, especially if you're new to this podcast or new to investing when we talk about losers. Let's go there.

Point No. 1: This is normal. This is normal. Losing happens all the time. In fact, studies have shown that if you look for stocks that beat the market, you might think that half of the stocks in the stock market beat the average and the other half, you'd think, would lose to the average. But the truth is, it's actually skewed. A minority of stocks actually beat the stock market averages. They pull up the losers, but there are far more losers to the market than winners to the market when you look at broad studies of the stock market. That's interesting on its own. It's normal to lose to the market when you pick a stock. That's, in a lot of ways, why people favor index funds. They figure, "I can't find the winners. How could I possibly, especially if I'm not interested in the subject or ever studied it? So why wouldn't I just buy the average?" After all, the majority of stocks lose to the averages.

But we're not just talking here about losing to the averages, I'm talking about losing flat out, like, losing money. Going down from 0% into the negatives, losing 20%, 30%, 40%, or, in the case of our six stocks this week, stocks that have all lost between 55% and 70% of their value inside the last three years. And yet I'm here to say, again, this is normal. It's normal, especially if you take the Rule Breaker approach. After all, as I've many times discussed before on this podcast, at fool.com, in our books, in press interviews, I've talked about how we invest like venture capitalists. We take risks. We look our CEOs in the eye and we say, "I like that person. I believe in him or her. I believe in the product." It's kind of like what they do in Silicon Valley with start-ups. We don't focus too much on the near-term results. We think much bigger and longer-term about what things can grow into, what they can become, which caterpillars will become butterflies, and we buy them in those caterpillar larval stages, and we hope that they become butterflies. We hope that our flowers bloom. But we're used to many of them not, just like any venture capitalist. Many venture capitalists comb through any number of ideas, invest in some of them, lose with many of them, but find some winners, and the winners win so well that they do well overall. That largely describes the Rule Breaker approach to investing.

This is normal. In fact, if you don't have a significant loser, if you've never bought a stock that got cut in half for you -- well, on the one hand, I'm going to congratulate you, but on the other hand, I'm going to wonder whether you're investing like a Rule Breaker, whether you're taking the risks that you should to really find the best stocks. So, even though this week, we're going to be combing through the laggards and the ugly, ugly dogs, at the same time, you should know they're surrounded by some wonderful companies. We'll talk a little bit about that this week, as well. And just know that it's normal to have a mix of losers and winners.

It's also normal in one other regard. It's normal for The Motley Fool, it's normal for me, to talk about losing and losers. I realize we live in a world where you'll rarely see somebody talk about how they blew it or lost on CNBC or in The Wall Street Journal. Most people are talking about their winners. The ads that you see are going to be all about what's winning and what's working. People don't really want to talk much about their losers. But from day one, when we called this company The Motley Fool, I hope it made it clear to you, our customer or prospective customer, that we're very comfortable saying, "Hey, I'm a Fool. I blew it. I didn't do that well." It's just natural for us to fall on the ice as we're ice skating. It's part of the game of learning how to invest, being willing to fall out there on the ice. This is normal, point No. 1.

Point No. 2. This one is particularly for people who are new to the stock market, and this time of year, tapping into fool.com or listening to this podcast. We probably have far more new people than usual because we make our New Year's resolutions, and a lot of us think about our health or our wealth to kick off the New Year. You might well have tapped in and found our podcast, and you might be thinking, "Here's the one thing I don't want to do, I don't want to lose." When most people come to The Motley Fool as new investors, the one thing they don't want to do with their first stock is lose. They might pick one of my stocks. They'll listen to me and by one of my stock picks, and it'll go down 7% that first week. And we'll see messages on our discussion boards, people expressing worry out there on social media. "What do I do now? I'm down 10%. Maybe I shouldn't have done this. What should I do?" They're reacting to what the stock's done. The market is very volatile. The vicissitudes of the market aren't worth paying much attention to from one day or week to the next. But people very naturally, especially as new investors, really get involved in that up-and-down and in the day-to-day, especially if it's down a little bit. That can be very disconcerting. So, point No. 2: I don't want you to live in fear of losing.

As has often been pointed out, psychologists tell us that the pain of loss is three times the joy of gain. I'll say that again: The pain of loss for human beings is three times the joy of gain. And yet, what's amazing about the stock market is, the worst you can ever do -- and I've still never done this -- is go down 100%. The best you can do is kind of unlimited. We have stocks that have made more than 100 times their value, and they're still going up. What's amazing about this, psychologically, is even though psychologists tell us that as a species, we fear loss three times more than we enjoy gain, the stock market directly reverses that. The pain of loss is tiny compared to the joy of gain. The gains that are earned over longer periods of time are infinitely more satisfying numerically than the losses that we suffer.

Again, even though we're just going to focus on the losers this week, please know that you shouldn't live in fear of those losers. You should expect them. They're a normal part of life outside investing, and yes, they're also a normal part of investing.

Finally, point No. 3. I'll mention a few of these -- over these three years, we've had some tremendous winners. There's not actually a single podcast that I do every year that talks about my biggest winners. I mean, I love to thread discussion of what works about investing in a lot of our podcasts on an annual basis. That's a big part of Rule Breaker Investing. But truly, I never once focused on just what were the biggest winners and what can we learn from those, because I think it's more fun to look at the biggest losers. I think we all enjoy a good explosion in the cinema. It's more fun to do the bam, kapow, whack moments for this podcast with our losers. But it's worth remembering that these losers are surrounded by much more impressive winners.