BP#38 - Why Losses Matter More Than Profits

Read Time: 4 min 

Welcome to The Weekend Investor, a weekly newsletter where I provide actionable ideas to help you build a  wealthier, healthier, and happier even if your time is limited.

Newsletter at a glance: 

This week's newsletter was inspired by Alex Hormozi who grew his business from $0 in sales to $100M in 44 months. If you want to check him out on YouTube follow the link.  Alex Hormozi - YouTube.

Most businesses fail for two reasons. 1.) Not enough clients. 2.) Not enough money. 

Most investments fail for two reasons. 1.) Too many losses and not enough profits. 2.) Losses are more significant than profits.

2022 was the worst year for the S&P 500 since 2008 costing investors over $8.2 trillion in losses. 

The best framework I've seen for outsized returns on anything is avoiding losses and drawdowns. Read until the end. 

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Losses Are More Important than Profits 

Lately, I have become obsessed with not giving back hard-earned profits in the form of losses.  

There's an adage that I think is relevant to this discussion. 

"Take one step forward and two steps back."

Ok, now what happens if we do this 10 times? We've taken 10 steps backward, right?

Simple arithmetic right? Right. 

Please don't take my word for it, consider these world-renowned investors. 

"Rule #1 is never lose money. Rule #2 is never forget Rule #1."  - Warren Buffet 

"It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for." - Robert Kiyosaki 

" The way to build long-term wealth is capital preservation and home runs." - Stanley Drukenmiller

"You have to say to yourself, "If I'm right, how much am I going to win and if I'm wrong, how much am I going to lose?" That's risk/reward ratio." - Peter Lynch  

" I love quotes... but in the end, knowledge has to be converted to action, or it's worthless." Tony Robins

I could probably go on for days naming countless successful investors whose philosophies about losing money are virtually the same, but you get the picture. 

However, this is one of the most challenging concepts for investors to get right. 

It's not your fault though, you've been programmed to think this way. You have been programmed by large financial corporations to be the bag holder. 

Bag holder - the person holding the bag when the shit hits the fan. 

Are you familiar with buy and hold? How about dollar cost averaging? 

Ever wonder why your 401K is so limited and doesn't allow you to move money in and out of positions very often without being penalized? 

Mutual funds with their billions of dollars to invest can't move in and out of the market to avoid losses and therefore, they don't want you to either so they have conditioned you to believe that the best strategy is to keep your money invested. 

These are lies. As an individual investor, your number one advantage is that you can get in and out of the market quickly. Why would you give away this advantage? 

The easy answer is that you may not know how to take advantage of this ability. 

Losses work geometrically against you and prevent you from becoming wealthy

It is possible to save your entire life and never really get ahead. It is very difficult to get ahead whenever you are taking one step forward and two steps back but this is how most people operate in their 401K and IRAs.

Most people allocate money to their 401K or IRA, set it, and forget it. The problem is that markets are moving faster than ever, and corrections and drawdowns are more frequent and intense robbing you of your financial future.

Inflationary pressure compound this problem. If you only make 6% per year in your 401K or IRA, you pay the mutual fund 1-2%, and inflation is 6-7% how much is left over? In some cases, you may have a negative return.

6% (average annual return S&P 500) - 2% (mutual fund fees) - 7% inflation = -3% return on your money. 

How these losses are keeping you poor

Losses work geometrically against you. This means that if you take a loss, then you need an even more significant gain to get back to breakeven. Here's a cool infographic to help illustrate. 

Framework for Preventing Losses and achieving success in your 401K and IRA

The stock market can be a fantastic tool for growing wealth and securing your financial future, but you have to use all the resources available to you and stack the odds in your favor. Here's how. 

Step 1  -  Learn how to time the stock market and sidestep market downturns. 

Limiting your losses will help you magnify the compounding effect of your gains. (Don't believe what others tell you about timing the market. Just because someone can't do something, they want to tell you you can't either.)  These are lies. 

Step 2 - Maintain a positive profit-to-loss ratio.

To take advantage of compounding growth in the market, your gains have to be larger than your losses. Stay invested in the market using low-cost ETFs (IRA) or Index Funds (401K) during bull markets to take advantage of long-term gains. 

Step 3 - Keep a long-term outlook to prevent making bad decisions. 

Compounding takes time. Keeping a long-term outlook will prevent you from making bad decisions that may lead to large losses in your account which can be difficult to recover from.   

Continuously save and invest to allow the power of compounding to work for you. Make money while you sleep. 

My Luck Mantra 

As a useful rule of thumb for your journey: 

"Remember that luck is putting yourself in the best possible position to get lucky."

What happened this week?

This week I worked diligently on my new course helping busy business professionals stop the bleeding in their retirement accounts and earn financial freedom faster than they ever thought possible. 

Never lose money in your 401K or IRA to a market correction again! How anyone can manage their own 401K or IRA portfolio and beat the market without taking on unnecessary risks.

Pre-register for the course today to reserve your spot and secure your early registration 10% discount when the course comes available for purchase.  

Pre-Register Here