“Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.” — Benjamin Graham
Warren Buffet once said: “Rule number one of investing is don’t lose money. Rule number two is don’t forget about rule number one.”
Whether you like Warren Buffett or not, it’s important to look at the downside of your investments.
Every investment carries risk.
A lot of people think they’re geniuses when the stock market goes crazy like it did in 2020 and 2021.
When you look at the up years, the average gain of the stock market is around 15% per year.
That sounds amazing, right?
Everybody’s a genius when they invest during these times.
But when you look at the down years, the gains go down to about 7% or 8%.
The volatility of the stock market is a downside that can really kill your returns.
No matter what you invest in, whether it’s real estate or stocks, it’s important to consider the downside.
Today, I want to talk about how to avoid losses.
Let’s jump into it!
1. Losses Kill Returns
If you have losses, they will absolutely destroy your returns.
If you have a 50% loss in any investment, it takes a 100% return to get back where you started.
Let’s say you have $100 and you lose 50% in an investment.
You’re down to $50.
You must have a 100% improvement in order to get back to that initial $100.
If you gain back 50%, you’ll only be at $75.
If you have equal losses and gains, such as gaining 5% and losing 5% the next year, you’ll continually lose money.
Warren Buffett also said it doesn’t matter what you invest in.
You will invest in many different things over your career.
But if you can, just avoid losing money.
One time I lost $70,000 in one day.
That was a bad day.
I was sitting in my car on my computer at my old job wearing my medical scrubs having just left work at the hospital.
The market had closed and I realized I lost $70,000 in one day.
I felt so small.
I felt like a failure.
I felt disappointed and angry and upset.
If that was you, what would you say to your spouse?
What would be going through your mind?
Losses have a psychological effect, too.
I used an options trading strategy that was not simple.
But I did learn something that day.
I learned that complex options trading probably is not the best track for me.
Multifamily is a much better fit.
Now we’ve raised over $25 million.
We’ve got $200 million in multifamily real estate.
If you do options trading, that’s great!
Just consider your downside.
The other thing to consider is inflation.
Everybody is interested in inflation.
You’re getting a positive return, but you’re actually losing money.
The official inflation number at the time of this video is 8.3%, although it’s probably closer to 15%.
If inflation is 15% and your investment gives you a 10% return per year, you’re losing a real return of 5% per year.
Inflation by itself is eating away around 15% of your money’s value.
I position myself in a lot of inflation hedged things such as real estate and precious metals.
No matter how much money they print, those assets will always have value.
The investments will actually keep pace or even get ahead of inflation for various reasons.
2. Always Consider Downside Risk
You should always consider your downside risk.
A lot of investments have a lot of downside risk.
Your job is to determine what that is.
There’s a quote from the movie Rounders that says if you’re at the poker table and can’t figure out who the sucker is, then you’re probably the sucker.
If you don’t see a downside risk in an investment, then you’re probably missing it.
Every investment we do, whether it’s multifamily or an ATM machine fund or my personal investment in self-storage…
There is always downside risk.
Nothing is guaranteed.
You need to figure out the risk and how you can limit it.
We recently closed a deal in Jacksonville, Florida that’s turned out really well.
But even though it’s going well, we’re trying to be conservative on our projections.
You can make the numbers say whatever you want them to say.
Projections are made up figures of what’s going to happen.
Some will say how the investment will be perfect and nothing will ever go wrong.
That’s not reality.
Things will come up.
Things won’t go as expected.
So how do you project that?
We look at rent growth.
Even if rent grew 20% or more per year in the market, we’ll never project that number.
We’ll project something closer to 3% or maybe we’ll predict no growth.
You should always be very conservative.
3. Find Dhandho Investments
I have a book called The Dhandho Investor by Mohnish Pabrai. He’s also a big fan of Warren Buffett.
He talks about this idea of “Heads I win and tails I don’t lose much.”
So if a deal goes well, you will double or triple your money.
If it doesn’t go well, you’ll at least keep what you have or lose very little.
I was making money with my option strategy, but I didn’t realize there was a 15x downside risk even though I was making $5,000 a month.
Or maybe I did realize, but I thought it was never gonna happen.
That was a good learning lesson for me.
Losses can actually teach us how we should invest.
In multifamily we try to find deals that have a lot of upsides.
For example, at the time of writing, average rents in Jacksonville, Florida are around $900 on some of the units we are buying.
We have 1,000 units in Jacksonville.
The going rate for apartments in that area is $1,425 after renovation.
That’s over a 50% upside!
Rents could potentially go down – we’re already seeing that in the market.
As long as we can put $10,000 in per unit, we can do renovations to increase the unit value.
We’ll be able to take advantage of the upside AND we are limited on our downside because we are adding value to the property.
I also like owning real assets like metals.
I think metals are great because no matter how much money they print, an ounce of gold is still worth an ounce of gold.
Owning metals is also a hedge against inflation.
Owning physical assets has a lower downside, even if they go down temporarily in value.
A lot of people gamble on their investments.
Don’t roll the dice!
Do something that will be good for your financial future.
Try to eliminate the downside.
Even if the returns are a little less, try to do something for the long term that will help protect you from inflation and investment losses.
Now I want to hear from you!
What’s something you have lost money on?
Share your story in the comments below and help lift up our community.
Before you leave, make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
