Wrapping up this two-part series on losers, David explores the lessons we should -- and shouldn't -- learn from investing mistakes.
Rule Breaker Investing
David's Biggest Losers - Part 2
It's the Rule Breaker Investing Podcast with Motley Fool co-founder, David Gardner. And welcome back to Rule Breaker Investing. I'm David Gardner, your host, great to have you with me this weekend. If you were listening last week, you know that we talked about my five biggest losers, the five worst stocks that I have ever picked for Motley Fool Services, four of which were from Motley Fool Rule Breakers, the other which is from Motley Fool Stock Advisor. All five of these stocks losing, I hate to say this, but I'm going to say it, more than 90% from where I recommended those stocks to members back in the day whenever that day was. And we talked about those five. I'm not going to summarize them now, but I did say that we would continue the series this week, and we're going to, we're going to conclude the series this week, talking about losers. This is losers podcast number two in our losers series, but this one is where we reflect on lessons from losers. And I talked last week about, you know, companies, each one, I looked at it, said, kind of, here's why I think this one lost. So you can go back and listen to that. But really, we're going to be talking more generally this week about learning and learning from losers. So, you know, when I first was approached with this idea, I mentioned Darren Hoke, our listener and longtime Motley Fool member who said, "Hey, Dave, talk about your losers." And I did it last week. It wasn't very fun. It shouldn't be why I would be talking about your losers be fun. But I thought more about it and why wasn't it fun? And the answer is because it's kind of like asking a baseball player, you know, reflecting back on your career, what were your five biggest strikeouts? And what did you learn from them? And the answer is I wasn't a baseball player. I was up until high school ball where my career ended because I wasn't good enough to play at the University of North Carolina, but you know, at some point looking back on our careers, we don't probably spend a lot of time thinking about our five biggest strikeouts, especially in baseball, you go up to the plate a lot. And why would you remember this strikeout versus that one? You tend to remember your home runs, and that's going to foreshadow where I'm headed with this podcast. But just a brief reflection that it's not something I'm preoccupied with or think a lot about, even though it sounds horrible, 90% losers. I think that's because I want to say this important thing to you this week. Be careful about the lessons that you learn. What you choose to take away from the good and bad things you do on this earth is your own choice. And for me, I've learned that a lot of the lessons that I might take away from my losers might prevent me if I learn them too well from getting real winners. So let me give a quick example. A number of our companies that we talked about last week, my 90% losers, I would describe as rather opaque businesses looking back. I mean, Affymetrics, I'm not brilliantly positioned as an internet entrepreneur to really assess gene assaying or force protection. I wasn't out there in Iraq using the MRAP vehicles that were saving lives as bombs blow up underneath them. And American soldiers' lives were saved. I don't have a great read on the Department of Defense and how it views force protection. And it was true of a number. In fact, all five of those companies were pretty opaque. So the lesson we could learn is don't invest in opaque companies. The problem is, the problem with learning that lesson too well is that the single best stock we've ever picked at Motley Fool Rule Breakers is Baidu. And Baidu, as you may or may not know, is the dominant search engine in China. China, I don't read Chinese. I've never used that search engine myself. How Chinese companies account for what they're doing and the government that oversees, in many cases, constrains or makes even more opaque, the entire business climate of that country, those things are all pretty opaque to me. And yet our single best performer has that same quality that we could say, well, we're not going to do that anymore because look what happened to headwaters and Affymetrics and force protection. So be careful the lessons that you learn and the lessons that you learn. That's your choice, what you're going to take away as you reflect on whatever happened good or bad in your investing or your life. And in fact, I think a really rule breaker approach, and I'm going to put this out because it's the Rule Breaker Investing Podcast, you're with me this week, I'm going to suggest that you tend to learn lessons not from your losers, but from your winners. I spend a lot more time as an investor thinking about why something worked than thinking or fretting about why something did not work. And I believe that's a very contrarian thing to say. I think that's a very capital F foolish, a very rule breakery thought for you this week because most people are all about trying to learn lessons from their loss because it makes them feel better about their loss. And I do this too, it's human nature. When something goes wrong, you're like, well, at least I'm going to take something positive and learn from that thing, but the problem is when you learn too well from things that didn't go well, I'm not sure that's preparing you a lot of the time for real success. And at least within the investing context, which is all I'm talking about this week, I think you're going to be more successful studying success than studying failure. So yes, I love positivity, I've read a little bit into it. It's definitely a relatively new school of psychology, Martin Seligman from the University of Pennsylvania is considered kind of the godfather or grandfather. This is only about 20 years old of positivity, but the more that I look into that and I read, I dabble as a reader across many different subjects. So I'm not highly studied on this. I think that positivity is important for successful investing. And here's why I think this works. There's a mechanism that's really important that I hope I hope you'll remember from this week's podcast. So psychologists tell us that the pain of loss is three times the joy of gain. The pain of loss is three times the joy of gain. And that is just rooted in human nature. It's been demonstrated through behavioral, economic studies. There's all kinds of research and backing that suggests that is true of our nature. But now let's talk about it in an investing context. The most money that you can lose on a bad stock pick I talked about last week, it's about 90 or so percent. That's the worst you can do with your worst pick, your biggest strikeouts. What's the best you can do? Well, I've already mentioned one good example this week, Baidu, which we picked at $8 a share in 2006 and today it's about 167 or so as I take this podcast, 8 to 167. So it's up 20 times in value. The worst you can do is minus 100 percent. The best you can do in this case so far for rule breakers, up 1900 percent. Let's stick with math and ratios. If the pain of loss for human nature is three times the joy of gain in investing terms, that is poison. That is exactly how you should not be thinking about your money because mathematically, let's talk ratios and stay with it, the joy of gain is often for patient, foolish, rule breaking investors is often can be 20 times sometimes 100 times the pain of loss. It exactly flips, it inverts the ratios that are hard coded into all of our fellow human beings around us and so this is why I choose to learn lessons from my successes and why I suggest that you should too. This is why I tend to forget my worst stock picks and write them off. I like to go over them because we do that at the Motley Fool. We talk about our record, the goods and the bads and we try to learn some lessons in both cases but I would suggest much more often than not you and I stick with the knowledge that the joy of gain far exceeds the pain of loss for investing, investing the way we do it and therefore you should be very focused on being positive and learning from the things that are working around you and not spending a lot of time as some new Motley Fool members do, ruining or bemoaning that a certain stock, maybe their first pick they ever made is down. We get message board postings at Fool.com from people who say, "I just bought my first stock and it's down 15% I'm going to cancel the service. This isn't working for me." That's sad across a number of levels which I won't talk about this week but clearly the one that I'm highlighting here is that a single loser means very, very little to anybody who's going to step in the batter's box every month or every year for the rest of our lives. It shouldn't define who you are and what you're doing and you shouldn't spend too much time worrying about that and we're going to be wrong one time out of three anyway and four times out of ten. Here's a great stat, a horrible but beautiful stat. In the history of Motley Fool Rule Breakers we have picked, I have picked, 41 stocks that have lost 50% or more. So our service has been running since October of 2004 so we're in about our 12th year picking two stocks every month, 24 year, so 24 times 12 we picked nearly 300 picks and 41 of them have lost 50% or more but here's a beautiful stat, the other side of that coin. The 41st best stock we've picked is up 192%. The 41st best stock has generally more than tripled all of our 50 worst and that's just the 41st best. The best I mentioned earlier by do is up 1900% and so that single stock largely wipes out all 41, 50% losers combined on its own and that's why this approach to investing and our Rule Breaker philosophy, if you follow it, if you understand it, if you embody it, if you internalize it and if you make it count for your money that's why you're going to do great and why a lot of Motley Fool members are very happy after being subscribers to Motley Fool Stock Advisor or Rule Breakers or Supernova for years now. So remember that stat and to summarize, we choose to learn what we want to learn from what's happened and I encourage you to be contrarian and tend to try to choose to learn lessons from the things that you see around you that are working and not fret too much about the things that aren't and often lessons that you might learn from things that have not gone well might prevent you from the things that do go well because sometimes the same mentality leads to both. But if you're going to feel pain at a rate three times the joy that you might feel, then I can see how you might end up being gun shy and not as successful as an investor. So since this is the Rule Breaker podcast in closing and I'm encouraging you to break the rules of how you think about investing and in this case, partly human psychology, I encourage you to be foolish and think differently for most of the rest of the people who are too worried about losing money for this or that stock. I am reminded of one of my favorite topics which is connected to this week's podcast and it's what I call true wisdom and I've tried to touch on it a little bit obliquely this week. But in an upcoming podcast, I'm going to do my true wisdom podcast where I can talk about I think how you really should be thinking about not just investing but about other aspects of your life in a wiser way than most of us are often used to. It's very, very connected to these, these ideas of winning and losing and how we react to them and how we, how we size up the world around us. So without droning on any further this week, I'll just leave it right there. We may or may not do true wisdom next week, but I already have my next 15 or so podcast planned. So we'll see where we want to take this. I will encourage you if you do want to join me on our discussion boards at the Motley Fool or you can drop an email or see our website rbi.fool.com. If there's something you'd like me to speak to, I'm always open to that. I'd like to thank Darren Hoke in closing for suggesting we cover losers which I've done in this podcast in the previous one. And all that said, I'll see you next week, full on. As always, people on this program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at rbi.fool.com. [MUSIC] [BLANK_AUDIO]