Some of you don't want to hear this…

I don't know of any way of investing without the risk of the occasional loss.

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So, today is 'tough love' day.

At least a little bit.

Maybe it's better described as 'dose of reality' day.

And it's motivated one part by some feedback we received and one part by my desire to help you become a better investor.

First, the feedback.

Frankly, we get a lot of it, directly, on our member forums, and on our social media posts.

It invariably takes the form of "Yeah, but what about [Company X]?"

Company X is usually a recommendation we made, that hasn't turned out well.

Maybe we sold, and recommended members crystallise a loss.

Maybe we're still holding, but the recommendation is losing money.

Hence the — usually sarcastic — "Yeah, but what about [Company X]?" comments.

Here's the 'tough love' bit: There have been more than a few Company X's in our corporate past.

There'll be more in future.

And here's the 'dose of reality' bit: It's unavoidable, if you're going to buy shares and – brace yourself – it's not even necessarily something that we should consider a failure.


Them's fighting words, right?

Kinda, yeah.

If it's jarring, that might be because people we're all so used to having politicians confirm our grievances, and tell us that we are all precious flowers who have been egregiously wronged.

So, bring it in tight.

If you think we – or anyone else in our industry – can provide perfection, well, ask people who invested with Bernie Madoff how that ended.

See, the only way to avoid losses is not to invest.

And that means inflation will slowly (or not so slowly, recently) erode your purchasing power.

That's some seriously expensive risk avoidance, I reckon.

Instead, I think you should consider investing as a game of probabilities.

We want to be right, often enough, and by a large enough margin, that the winners more than offset the losers.

Our specific aim is to do precisely that so that, over time we beat the All Ordinaries Index (ASX: XAO).

It's why we recommend our members diversify across our recommendations.

It's why we recommend they take a long-term perspective.

It's why we recommend they add to their portfolios regularly.

It's why we recommend they expect volatility.

And it's why we tell them that not every recommendation will work out.

I'll be honest: criticism from members does sting, when it's deserved.

I hate our members losing money if they buy a recommendation that doesn't work out.

But I don't know of any (legal, and non-dodgy) way of investing without the risk (and reality!) of the occasional loss.

You probably know Warren Buffett, the world's greatest investor. You might know his business partner, Charlie Munger.

Here's how Charlie describes their investing:

"We look for a horse with one chance in two of winning and which pays you three to one."

Notice that Charlie doesn't say 'guaranteed to win'.

He's looking for a situation where the potential returns are in excess of the costs of losing.

Let me put it another way.

Let's say I gave you a rigged coin, that was going to land on heads 60% of the time, and tails 40% of the time, and I offered to pay you two-to-one if you guessed correctly.

I hope it's clear that you should take my bet, and play for as long as I let you.

But – and here's the important part – you'd still lose 40% of the time!

You'd keep playing anyway, though, because the odds would remain strongly in your favour, and the overall returns would more than offset those losses.

You wouldn't say "But what about that toss that came up tails!".

Why am I sharing all this?

Reckon I'm just annoyed? Maybe a little.

Being defensive? Perhaps.

But more importantly, I want our members and readers to know how to think about investing.

To know what to expect.

To be alert to (false) promises of loss-avoidance. Or the costs of same.

To understand how the very best investors (Buffett, not me!) invest.

If you're dead set against losing money on any single investment, my advice is simple: don't invest.

(But also, be prepared for inflation to silently steal your buying power.)

If you want to make money, over time, despite the occasional dud investment, then I think a diversified portfolio of quality shares will likely look after you very well, just as they have done over the last 100-plus years.

No, I can give you no guarantees. The regulator would take a very dim view, but more importantly, it would be immoral and unethical.

Instead, I can tell you how I invest. How we think about investing at The Motley Fool, and how people like Warren Buffett (and others) approach investing:


Understanding that not every investment will work out. But that, done well, the winners should well and truly offset the losers… with enough left over to build serious long term wealth.

If you're not prepared to embrace that, then it might be time to reconsider whether investing – with The Motley Fool or anyone else – really is for you.

Does that seem harsh?


I did promise you tough love, after all.

Because, I want you to be prepared for the reality of investing. So that, when the inevitable – temporary or permanent – losses come, they won't push you off course.

The best bit?

If you can, truly, make your peace with that… embrace it… and invest anyway?

That's an investing superpower, and will stand you in very, very good stead.

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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