Nietzsche on Investing

Friedrich Nietzsche once wrote of man, "Whatever does not kill him makes him stronger." It's a fact with universal applicability, especially in investing: Surviving adversity builds strength and character... and makes you a better investor. I know, because I've been through the fire myself.

In an exercise of mental judo, today I want to highlight what some investors might think were Motley Fool Hidden Gems' greatest failures. But rather than apologize for them, I'll use them to demonstrate why disaster doesn't make us weaker investors -- it makes us stronger.

Since Hidden Gems began publishing about two years ago, we've experienced some spectacular successes -- companies such as Middleby, Saucony, and FARO Technologies have all doubled in value and demolished the market's returns in record time. But we've also endured some pain.

Before our recommendation of e-debt broker eSpeed (NASDAQ:ESPD) was even a year old, it had lost more than 50% of its value. In six months, QLT declined by a third. In all, nearly one pick in three has declined in value.

While we ordinarily point out that that's pretty irrelevant, given that overall our portfolio of small-cap superstocks is beating the market 32% to 9%, that's not what I want to discuss today. Today, I want to revel in those disasters -- and explain how they've helped me, as an individual investor, to finally get with the program and become a long-term buy-and-hold convert.

We are Fools. We are you.
At The Motley Fool, when we say we're "investors, writing for investors," that's not just a tag line -- it's simple fact. We're "little guys," just like our readers. We've got the mortgage, the little brick rambler in the 'burbs, the spouse and 2.4 kids back home. But more importantly, we've got the bulk of our life savings invested in the common stocks of high-quality companies. We know that, historically, that's been the most profitable place to invest our savings for long-term financial reward. In short, we don't just preach this stuff -- we practice it.

What does not kill us.
But we also know that with investing comes risk. In the short term, you will definitely lose money on some of your stocks at one time or another. Not "may lose" -- "will definitely lose." Case in point: after Hidden Gems "bought" eSpeed, I personally bought the stock. Note the lack of quotation marks. I bought the stock with real money. And I lost big.

How big, you ask? Something on the order of $20,000 big. In the line of investing disaster trophies adorning my fireplace mantel, eSpeed is one of the biggest. It's been nearly a year since that unhappy experience, and it still smarts. But don't cry for me, Argentina. Because here's something you might not expect: I'm happy for the pain -- or rather, happy to have endured it and remained in the game.

.makes us stronger.
Because, you see, while eSpeed made up a significant slice of my portfolio at the time, it was far from my only investment. Sure, I lost half my money in one company, but by remaining invested in many more, by "staying in the game," I gave my portfolio a chance to outlive that mistake. Long story short, the portfolio is about 50% bigger today than it was when eSpeed took its swan dive.

Now, every story needs at least one moral, and this story has two. The first one is pretty simple: Stay invested. If you let one mistake scare you away from the stock market, you forfeit your chances of recovering from your loss.

One mistake does not a portfolio break
The second moral builds on the first. If you can soldier on after one bad stock pick, over time I'll wager your results will mirror my own experience: One mistake does not a portfolio break.

And not just because smart investing ensures that your many winners will outweigh your occasional losers. Big losses also help you to put small losses in perspective. After enduring a 50% loss, you'll find yourself less inclined to sweat the small stuff. Personally, having lost 50% (and more) in various individual stocks from time to time, watching one of my stocks fall 10% or 20% simply doesn't faze me.

I've learned that, when you find a company whose stock is significantly undervalued, buy it and stay the course despite pricing wobbles. Worst case, you're unlikely to lose more than you've lost on other stocks in the past. And if you survived those disasters, then chances are you can withstand one more. And that's the worst case.

Best case, after falling a bit, your stock may well rise again -- perhaps for much longer and higher than you ever expected. Just think back to the Great Internet Stock Bubble, when the S&P 500 crested at 1,527 five years ago, before plunging 48% in two years. Investors in any number of great companies suffered losses when the S&P turned south, only to find that today, five years later, they're sitting on significant gains since the S&P hit its March 2000 high:

All prices split-adjusted

Be an uberinvestor
The key, as always, is finding those great stocks to begin with -- and as Nietzsche would note, those aren't the stocks the rabble is buying. That's where Hidden Gems can help out. Every month, we screen thousands of stocks, narrowing them down to a few hundred "likely suspects," which we research intensively before choosing the two very best small-cap investing ideas for our subscribers. To date, we've come up with nearly 50 ideas for our members and, if you're willing to give the service a try (free for 30 days), you can view the entire archive of all companies we've ever recommended -- research, write-ups, and all. If you don't absolutely love the service, you can cancel anytime and receive a full refund of the unused portion of your subscription. No hassles. No strings attached. You have our word on it.

Fool contributor Rich Smith does not own shares in any companies mentioned in this article. The Fool's disclosure policy is as strong as it gets.