Scarred Knees?

By Brad Thomason, CPA

 

Have you ever had an investment that did not go as you hoped it would?

After the year that the stock market just had, that may not be a question on many minds right now.  Most equity investors are pretty happy at the moment with the way those holdings have done over the last 12 months.   Still, it is worth noting that the stock market’s performance last year was the best it’s been since 1995.  In between there were 17 years that were less generous (some of them profoundly so).  Which brings me back to my initial question.

Sometimes, as investors, we don’t get the results we are after.  I think at some level we all know that, but I think we also don’t like to think about it too much and wish it weren’t that way.  As an active investment manager (vs a guy who just talks about investing but doesn’t actually do very much of it himself, like a lot of “financial advisors”), I am constantly reminded of this.  Every week we look at new acquisitions and stuff we’ve already invested in, measuring how things have gone, whether the prospects have changed, and assessing the endless need to rebalance portfolios.  Most of the time our decisions lead to good results (knock on wood…).  But despite that, it is not uncommon for a given holding to fall a little short of the best-case scenario; and sometimes investments, whether of the financial-sort or the business-project-sort, don’t work out at all as planned.

Hedge fund manager Paul Tudor Jones II wrote the Introduction to George Soros’ now-classic book The Alchemy of Finance.  Jones tells us, “When I enter the inevitable losing streak that befalls every investor, I pick up The Alchemy and revisit Mr. Soros’ campaigns.”

Charles Schwab is now a household name due to the successful brokerage business he built; not the string of business ventures that he tried beforehand which ended in mediocre results and in some cases outright failure.  In a 1996 interview with Entrepreneur Magazine he said, “I learned that for every big success a person has, there must be one huge failure.  I think that’s the basic law of the universe.”

Mary Kay Ash reportedly used to say in her recruitment meetings that if any of the ladies present wanted to compare knees, she was quite sure hers would be the most scarred, as the result of the many times she stumbled on her way to the top of the cosmetics industry.

Investments don’t always go as planned.  No matter who you are.

To me, the key to dealing with these occasional occurrences is two-fold.  First, you need to take steps to limit the amount of damage that occurs when things don’t go your way.  Second, you have to reload and try again.  People who have had the most success investing, in business ventures or financial assets, have done so cumulatively.  They make a run at something they think will work, and if it doesn’t, they try again.  Because the most successful have learned that over time the wins tend to deliver more positive impact than the losses take away, and when that happens the long-term prospects move out of the realm of possible prosperity, ever-closer to the realm of inevitable.

Good luck in 2014.  But if you have an investment that doesn’t live up to its promise, just remember that you have some very good company.  And also remember that there are many alternatives out there, and that sometimes finding a better opportunity takes a lot less effort than you might think.

Above all, don’t get hurt so bad that you get knocked out of the game; and if you do get to stay in the game, keep playing.  That’s the key.

For as the writer H. Jackson Brown put it, “Opportunity dances with those already on the dance floor.”

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