“If you can’t spot the sucker in the first half-hour at the table, then you are the sucker!”
— Matt Damon (Rounders)
Today, I’m going to tell you about a very bad day in my financial career.
I lost $70,000 in one day.
At the time, my total net worth was about $200,000.
How do people deal with loss?
How do they evaluate loss?
My background is in medical device sales.
I remember coming out to my car after a medical procedure and sitting there with my laptop.
The stock market had closed and I’d lost $70,000 in one day.
I’d been using a complex options trading strategy called the Iron Condor.
After the loss, I felt like such a failure.
I felt discouraged.
I felt ashamed.
Something I wish I knew then is that losing money is not uncommon.
People lose money all the time in deals, investments, and the stock market.
It’s not something we should completely shy away from.
Warren Buffett has the famous saying “Rule number one of investing is don’t lose money. Rule number two is don’t forget rule number one.”
That can be very intimidating!
But the quote is really about minimizing your downside as much as you can.
There can be a lot of learning opportunities when you lose money.
Let’s talk about the three things I learned after losing $70,000.
1. Look at Everything as Learning
I run a meetup in Pasadena but years ago when I was simply attending there were two investors there.
One was Christina Suter, who is a friend and mentor of mine, and also Jay Massey, who is very successful at short-term rentals.
Jay stuck up his hand and asked how many of us had lost more than $50,000 in real estate.
Out of around 50 people there, maybe five or ten hands went up.
He then asked how many of us had lost more than $100,000.
A few hands went down.
He upped the amount to $250,000.
A few hands were still up.
He finally asked if anyone had ever lost $1 million in a real estate deal.
His hand and Christina’s hand were both up.
I knew both of them were Uber wealthy and successful.
The thing Jay learned from that experience is that it’s not wasted.
Nobody wants to lose $1 million.
But if we learn from it, the experience becomes incredibly valuable.
I made a $70,000 educational mistake.
What did I learn?
I am not a good options trader.
In fact, I don’t know many people who make a lot of money consistently in options.
It’s hard to win in that way.
After that failure, I tried something else.
I found investing in multifamily and was able to 20x my net worth over a period of four years.
From that loss, I actually learned what I’m good at.
I’m good at analyzing real estate deals.
I’m good at creating content.
I’m good at connecting with people.
Losing money can help you learn really important information about your strengths.
2. Minimize Your Downside Risk
Warren Buffett says to not lose money, right?
That’s something you should always keep in mind when making decisions.
In the options trading deal, I had made $20,000 over a period of three or four months.
I thought that was awesome!
I thought I would keep making money.
I didn’t see how I could lose $70,000, which was the max amount you could lose.
There’s a great book by Mohnish Pabrai called The Dhando Investor.
He talks about the strategy of “heads I win and tails I don’t lose much.”
That’s an asymmetric return.
It’s saying that if this goes according to plan, we make a ton of money.
If it doesn’t go well, my finances won’t be hit too badly.
In multifamily investing, we’ll have deals that will typically project a 14% to 16% annual return.
In the best case scenario, we’ve seen some deals that have 90% IRR in a year.
The worst deals I’ve seen are about 8% to 10% return per year.
So you have a limited downside, but you also have a lot more upside – especially with inflation.
In any investment strategy, you should ask about the downside of the investment.
Ask about the likeliest outcome.
If the deal has a 90% chance you’ll double your moneh, but it’s a 10% chance you’ll end up with zero…
That’s a lot of risk!
Maybe you shouldn’t put all your money in that investment.
I love the idea of trying low-risk experiments.
One way to do a low-risk experiment is investing your time.
Attend events, go to meetups, read.
Learning new things is a huge return on a very low investment.
3. Find Your Edge
I do monthly panels with amazing people.
I had one recently with George Gammon and Mark Moss.
I asked them where people should invest their money.
Both said people should focus on an area where they have an edge.
This can be something you’re really good at or something you have a connection with.
I didn’t have an edge in options trading, even though I thought I did. Ha!
Instead, I realized I had an edge and talent for multifamily deals.
I’m good at raising money and working with investors.
I’m good at educating people through blogs and videos.
If you don’t know what your superpower is, then go and find out!
Go to events and connect with people.
Invest your time and figure out what could work for you.
If you invest in deals, you might find your edge.
Now I want to hear from you!
Have you ever had a really bad investing loss?
What did you learn?
Let us know in the comments!
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
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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.