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Mr. Wonderful's Worst Investment and the Valuable Lessons He Learned

By Matthew Frankel, CFP® and Jason Moser - Jan 8, 2021 at 6:21AM

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Even the most successful investors make mistakes, but they learn from them.

Humility is a valuable quality for any investor to have. It's very important to be able to recognize when you've been wrong, so you can learn from your mistakes.

Even the best investors make bad investment decisions from time to time. In this Dec. 21, 2020 Fool Live video clip, Industry Focus host Jason Moser sits down with Shark Tank star Kevin O'Leary to find out what bad investment he's learned the most from. 

Jason Moser: We consider humility to be one of the investors greatest traits. I'm sure you believe that as well. The older I get, the more I enjoy being able to say, "You know what, I was wrong." Because it means that I've learned something and it's made me better. Looking back through your life as an investor, it doesn't have to be the worst, but what is one of the investments that really sticks out as not such a good one? What's one of the worst investments you've ever made? What did you learn from it?

Kevin O'Leary: I learned a very, very important lesson, and I'll never forget it, and it's a great lesson for everybody listening. I shorted Yahoo! before it was put into the S&P 500. I shorted it at $32 a share and I was convinced that it had no value and watched it go to $280. The margin calls, it was with the old Bear Stearns before it was gone, were in the millions of dollars an hour. I was committed to holding onto that short because I knew one day Yahoo! would be at least a zero, I thought. It took years. I remember I was golfing in Boston at Braeburn, my golf course, when my broker from Bear Stearns called me up and said, "Kevin, Yahoo is back to $32 where you started this horrific journey. Can I cover?" I said, "No. I think it's going to zero." [laughs] It's not that I was right. It's that I killed myself by not understanding that when you short a stock, your losses are unlimited. I tied up for years millions of dollars of my capital just for the margin to do something very stupid. Now, what I do in terms of being an investor, the lesson I learned there because I covered that short, I think at 1,250 and I made a few thousand. I made nothing compared to the money I risked. It was so stupid. But the point was, I never let a stock become more than five percent of my portfolio and I never let a sector become more than 20, ever, not ever. That way, when I own a Tesla ( TSLA -6.42% ) and it's doing its thing, I'm selling into the strength, keeping my five percent waiting, selling, selling, selling, selling, keeping my exposure. Now, I don't get all the winnings, but I also don't get the losses when it corrects because my acquisition cost is zero. I've covered it all off as it moved up. Managing those positions is what Beanstox does. It does the same thing if you're not doing it yourself. But it's a philosophy, 5 and 20. It's very simple to remember, 5 and 20. Don't get caught offside. That will protect your heinie for the rest of your life. Don't do stupid things like shorting the next Yahoo, whatever that is.

Moser: Five and twenty, that's better than 2 and 20, right? [laughs]

O'Leary: [laughs] Five percent weighting on the stock and 20 in the sector, it will protect you as an investor your whole life.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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