Investing Has Its Ups and Downs. Here's How Kevin O'Leary Knows When It's Time to Cut Losses

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  • Shark Tank investor Kevin O'Leary, aka Mr. Wonderful, has grown his net worth to $400 million by following important investment principles.
  • One is learning how to cut your losses so you don't lose even more money.
  • By knowing when to pull the plug, you can preserve your capital and focus on investing in your profitable ones.

You gotta know when to get out.

Being worth $400 million isn't bad. Shark Tank investor Kevin O'Leary made millions by making smart investments. What's the secret to his success? According to a recent tweet, "As an investor, you have to know when to cut your losses. That's why, when I look back at my losers, I don't dwell on them." What does this mean?

Know when to cut your losses

One of the most popular investment rules is to cut your losses early and let your winners run. On Shark Tank, O'Leary is well known for his ruthless approach to investing in startups. He believes, "If you can't make money after 36 months, and there's no path to making money, it was a hobby, not a business. You just have to take it behind the barn and shoot it."

O'Leary states that, "It's hard to know which ideas will thrive and which will fall short. As an investor, you have to know when to cut your losses. That is why, when I look back at my losers, I don't dwell on them. It's okay!"

Cutting your losses help you limit your downside. Even if it is a great business idea or investment, the importance of cutting your losses is in helping you make sure a small loss doesn't become a big one. O'Leary knows that not all the startups he invests in are going to succeed. According to data aggregated by Embroker, about 90% of startups fail. Knowing this, the goal is to focus on the ones that will succeed and make money. You don't want to throw away good money after bad money.

Don't lose money

Warren Buffett is considered to be the greatest investor of all time. His two main investing rules?

Rule 1: Don't lose money

Rule 2: Never forget rule No. 1.

Many investors hold their losers, hoping that they will come back up. Some will even invest more hoping to recoup their losses. By cutting your loss short, you can immediately preserve the remainder of your capital. You can then re-deploy your money to other investments that are doing well.

Pulling the plug early on an investment will proactively protect your portfolio and prevent you from possibly losing more money. For investments in the stock market, this can mean setting stop-losses so if the price falls below a certain level, you will automatically sell. For O'Leary, he set a limit of 36 months for a start-up. If they can't make money by then, he cuts his losses and doesn't dwell on them.

While nobody likes to lose money, the goal is to move on from losing ventures and focus on your winners. Taking a small loss is like paying an insurance premium to make sure you don't suffer a loss you can't recover from. Successful investors like O'Leary and Warren Buffett understand that your goal is to not avoid losses, but to minimize losses.

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