Holding yourself accountable for your performance is an essential part of being a good investor. Equally important, though, is being realistic about what your performance should look like. You should examine your process for choosing stocks and how you set up your portfolio critically, but if you set the bar too high, you’ll come to the wrong conclusions and actually hurt your long-term results.
Many investors are overachievers. We hold ourselves to the highest standards, always wanting to make smart choices with our investments. When a stock doesn’t work out, we beat ourselves up over it, and we want to know what we did wrong.
It’s not surprising that so many investors cut themselves almost no slack when it comes to losing investments. In school, we were trained to strive for nothing short of 100%. Miss just one question, and you can kiss that goodbye. Fall below 90%, and you’ll find yourself in B territory. And if you drop under 70%? Utter failure. In that context, every wrong answer takes on heightened importance, especially if you’re taking a test or quiz with just a few questions.
It’s only natural to take that experience and apply it to your investment as well. When you turn to the investing world’s greats, you’ll find plenty of validation for doing so. Just look at Warren Buffett’s famous two rules:
Rule No. 1: Never lose money.
Rule No. 2: Never forget, Rule No. 1.
If you apply those rules to every investment you make, you’ve fallen into the trap of thinking that nothing short of perfection will make you successful. That’s too high a bar to set.
The hard truth is that no matter how good you are at investing, you won’t see huge returns from every pick you make. Every stock’s fate depends on its ability to execute to achieve its full potential. Sometimes, known obstacles to success prove more challenging to overcome than anticipated. Other times, unforeseen issues arise that expose vulnerabilities that can hurt even the most robust businesses in their industries.
If you give up on investing the first time you lose money on a stock pick, you’ll ensure that you never lose money on another stock again. You won’t have to deal with the embarrassment of spending a long time looking at a business and coming to believe in its promise of success — and then making an investment that doesn’t deliver with strong returns. Part of being a successful investor, though, is being able to get past those inevitable losses and having confidence in the overall strategy that identifies promising, high-quality companies.
As it turns out, the premise that you have to be perfect to be a great investor isn’t just wrong. It’s spectacularly wrong. It might surprise you that you don’t even have to bat .500 to be a long-term winner in the stock market.
Here’s why: The most you can lose with stock is the amount you invest in it. Every time you research a company and buy shares, you set the maximum risk of loss that you’re willing to take. If you never make another investment in that stock, then you’ll never lose a penny more.
When it comes to the most, you can gain, however, the story’s different. We often look at stocks that have the potential to double in five years or be a six-bagger over the next decade, but we know that there’s no limit to how high top stocks can rise. Just look at the success stories if you search the movement of stock for some time. You’ll see dozens of doubles and triples, with a select group of 25 or so 10, and a few elite stocks that have produced gains of more than 10,000% — turning every $10,000 investors put into them into a cool $1 million or more.
It’s liberating to realize the bulk of your investment gains over your lifetime are likely to come from just a handful of stocks. It frees you to take calculated risks with the shares you pick, understanding that you may lose your entire investment on any one particular stock if things don’t work outright. It lets you focus on the big picture of identifying the companies that have the best chance to deliver life-changing returns. In reality, even your poor picks won’t usually end up as total losses.
It’s all too familiar for even any investors to judge themselves on every single investment they make. Don’t make that mistake. Face it: You’re going to pick some bad performers, and you’ll miss out on at least some of the big winners that your peers will find. As long as you discipline your approach and keep finding stocks of promising companies with the potential to grow into the success stories of tomorrow, you’ll be squarely on the road to reaching your financial goals and becoming a good investor.