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Here's How Mr. Wonderful Avoids Making Bad Investments

By Matthew Frankel, CFP® - Jan 2, 2021 at 6:42AM

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The "Shark Tank" star has a knack for finding good investments, but he also avoids the bad ones better than most.

When it comes to investing, your long-term returns not only depend on finding good investments, but on avoiding bad investments as well. 

In this Dec. 21 Fool Live video clip of our Industry Focus podcast, Fool.com contributor Matt Frankel, CFP, and host Jason Moser sat down with Mr. Wonderful himself, Shark Tank star Kevin O'Leary, to talk about how he tries to avoid making mistakes with his money. He relies on two things when it comes to avoiding big losses: diversification and a great support system. 

Matt Frankel: One of the things I love about you on Shark Tank gives is that you are the best at talking yourself out of bad investments. If you think that's a fair assessment. So, Joe Foolery , our user, has a question that says, "How do you fight off your greed, with so many opportunities out there for growth? How do you decide what not to investment in?"

Kevin O'Leary: That's a great question. That is a great question. I'll tell you what you have to do because I've already made this mistake so many times. The best stories when I was graduating from business school, this is how it ties together. It was the last week of the graduating cohort I was in there. There's probably 85 people in the class. We're finishing our MBA. We're really excited about getting out there. My dad talked to me to doing an MBA because he thought I'd never get a job. Here I am, finishing of business school and this guy comes in, he says, you guys think you're so smart. You have no idea what's going to happen to you. At 30, you are going to get eaten and spit out by the world. It's going to chew you up alive because you have no experience. You don't know what you're doing. I thought to myself, what an arrogant "beep" this guy is. You know who, I've turned into, that guy. When I go and lecture now, I say the same thing to these guys. You have no idea what you're doing. You don't have experience. The reason I'm able to curtail my greed is I've learned the hard way. I've had many catastrophic investments and I've had really fantastic outcomes and the difference is just diversification. I thought I can pick winners. You can't in venture investing, you have to invest in a lot. That's why I have a portfolio, I think I'm over 50 companies now and maybe 20% are going to fail. But because they are all diversified, I'm going to get some great outcomes. When I look at something I say to myself, I know I think it's great, but my gut tells me, look, nine out of 10 I pass on. I have a great team of guys. Alex, who runs my venture. Alex Kenjeev, Russian poet, speaks five languages, crazy dude. I mean, IP lawyer, business school grad, Russian guy. Just wild guy. All my CEOs love him, he's so nice. But he really drills in and says, "Here's why this is going to fail," and I say, "No, Alex, I think it's a winner," he says, "No, it's a dunk," and he's like a weasel. He rips the flesh until he finds out what the story is. Here's the way I run the business. I stay to him, "Alex, if we're going to invest in this thing, you have to borrow 15% from me so that you're putting your skin in the game and you're taking the same risk I am, and it's worse, you're borrowing it for me. If this thing fails, you owe me the dough," and if he is willing to do that then we invest.

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