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You probably know Charlie Munger.
He's the billionaire business partner of Warren Buffett, and vice Chairman of the company they run, Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.B) (I own shares, for the record).
Yep, he's kind of a big deal.
Not just because he's rich and well connected, though.
The man is smart.
I'm talking Mensa-smart.
Munger is a true polymath; a man who spends more time reading than almost anyone.
He also has a witty turn of phrase, and doesn't mince words.
Charlie is perhaps the man I'd least like to end up debating in a public forum, on any topic.
He's also eminently quotable. There are dozens of lines that, should you use them as investing guidelines, would almost certainly improve your results.
One of his best known is:
"I know I'll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn."
Why?
Maybe it makes us more humble.
Maybe it forces us to review our investing processes a little more carefully.
Maybe it helps our subconscious identify common traits of our losing stocks.
It's probably all three.
As well as being the Motley Fool's Chief Investment Officer in Australia, I run a couple of our investment services, including Motley Fool Share Advisor.
I'm pleased to say that, at the time of writing, our average return is showing the market a clean pair of heels.
Which is important for context, but not the point I want to make.
See, also at the time of writing, here's the return of some of my recommendations:
iSentia Group Ltd (ASX: ISD): -97.48%
Freedom Foods group Ltd (ASX: FNP): -92.62%
Retail Food Group Limited (ASX: RFG): -70%
Reject Shop Ltd (ASX: TRS): -67.14%
I could go on, but I think that's enough nose-rubbing for now, even for a bloke with a larger-than-average schnoz.
I hate those numbers.
They rankle, both professionally, and because I know our members followed that advice and lost money.
Don't tell my wife, but I feel worse about those losses than losses in our own portfolio.
They just downright suck.
They're examples of bad process, bad luck and just plain bad outcomes.
I make no excuses for them. I don't think all were in our control, but that doesn't pay the bills. The money is still lost.
So why don't I give up and go dig holes?
Because, thankfully, they're rare.
And because they're only a small portion of our overall scorecard result.
And, lastly, because we make sure we're diversified.
None of that is an excuse, by the way — I'm not trying to cover up a screw-up by saying 'look over there'.
But — and this is the unfortunate reality — they're going to happen.
If you want to avoid losers, stay in cash.
But good luck building a retirement nest egg that way.
No, if we want decent investment returns, we need to embrace the reality of risk.
There will be times when we will be wrong.
So how do we proceed?
Here's what we try to do at The Motley Fool.
First, we try to avoid stuff-ups.
Sometimes, I've just been plain wrong. For example, I can't blame anyone else for my Isentia mistake. I was just wrong and I have to learnt to accept that It happens.
Fewer of those, in future, is the aim.
But in other cases, we're playing a game of probabilities.
Every company has both growth potential and inherent risk.
The job of the investor, professional and amateur alike, is to find opportunities where we're being offered an outsized return, for the level of risk we're taking.
Or, as Charlie says:
"We look for a horse with one chance in two of winning and which pays you three to one. You're looking for a mispriced gamble. That's what investing is."
See, not a guaranteed winner (there is no such thing), but a bet where the return on offer is significantly greater than the risk.
If I could, I'd just repeat those last two sentences for the rest of this article.
Because, as an investor, if you can't internalise that, you're on a hiding to nothing.
You can't be right all the time.
And if it was possible, the guaranteed nature of the outcome would mean that your return would be almost zero (government bonds, anyone?).
So, while I hate those losses, I've learned to accept them.
For the record, my four largest winners at Share Advisor are +951%, +645%, +460% and +444%.
See the difference?
Now, of course I'd just take the winners and avoid the losers, if that were possible.
But it's not.
So, here's what I do:
I try to keep learning, refining my process as I go.
I make sure I'm diversified, so that one or two losers don't wreck my portfolio.
I remember that investing is a long game.
And — here's the tough love bit — if you only buy one, two or five of our recommendations, I can't help you.
We don't promise success on that scale. We can't. It's not possible, and such a promise would be illegal or at the very least deeply immoral.
I feel terrible about the people that lost money on Isentia.
But I also hope they made more money on other companies than they lost on that bad recommendation.
Statistically, that's likely — and more likely the longer they've been a member and the more of our recommendations they followed.
I don't blame you for being mad when you lose money. Especially on one of our recommendations.
No-one likes losing money.
But, as I said, it's happened before and it'll happen again.
It probably won't feel any better next time, either.
Hopefully, over time and over a diversified portfolio, the winners will outstrip the losers, in both number and size. That's been the experience at Motley Fool Share Advisor and in the vast bulk of our other services.
We have a gameplan that we think is a winner (and has done well for us so far). But just like in sport, you can't win the game with a single play.
You can be dirty about a missed tackle or a knock-on. A bad bounce or a missed shot. But that's not what determines success.
Nor is it decided in the first minute. Or first 5 minutes. Or first 60.
You've gotta play the whole game – the long game!
Fool on!
