The Motley Fool

How to Cope With Investment Failure

One thing which is guaranteed for all investors is failure. Like it or not, all of us will make mistakes in terms of buying shares which generate losses and also missing out on golden opportunities which could have been hugely profitable. Even experienced investors make mistakes.

For example, Warren Buffett bought too soon during the global financial crisis and endured short term paper losses as a result. He also failed to spot the potential of sectors such as technology and natural resources prior to booms in those industries.

However, where better investors prove their worth is that when it comes to failure, they don’t view it as a reason to stop investing. In other words, many newer investors may lose money and decide that investing is not for them, or that they are no good at it. However, better or more experienced investors learn from their mistakes and continue to invest, knowing that they are all the better for it.

In fact, investing has a lot to do with making mistakes. At its very core, nobody knows how any investment will turn out. Since humans have not yet evolved to accurately predict the future, errors are therefore inevitable. Accepting this fact is perhaps one of the most important parts of investing, since it naturally leads to a view that diversification must be undertaken in order to protect the overall performance of a portfolio when mistakes are made.

For example, you may find a company which has a low valuation, great management team, sound balance sheet and superb growth prospects. It may operate in an industry that has a bright long term future and which has a relatively stable track record of growth. However, it may release a profit warning, experience a natural disaster or some other one-off event which causes its outlook (and share price) to deteriorate. Therefore, it is clear that no investor can pick the right stocks all of the time, so diversifying in order to reduce company specific risk is a logical step to take.

As well as a logical response to failure, most investors require a sound emotional response. It is easy to become downbeat and frustrated with investment mistakes. After the event, things are always a lot more obvious than they were before the event. Experienced investors will often take a long term view of their portfolio and conclude that mistakes on specific stocks may hurt short term performance, but in the long run they are still likely to record portfolio gains.

As such, while short term losses may be disappointing, they are unlikely to have a major impact on long term portfolio performance. Convincing yourself that you are making progress on a portfolio level is likely to get easier with time, especially as you start to see the difference that investing in shares can make to your long term financial future.

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