Many investors I talk to always seem focused on the losers. Just because you lose some money on a portion of investments, doesn't mean that the whole strategy is bad. What matters is making money overall on the portfolio level. Losing money is part of the game on a portion of investments. Even Warren Buffett and Peter Lynch are not right 100% of the time.
Everyone is focused on the losers, and thus ends up missing on the big picture.
As they keep losing, their relative weight in the portfolio decreases and if I did not risk more than a certain amount (decreased by dividends received), they become a footnote.
At this point, they do not matter. Unless they turn around, which some time they do. (e.g. in 1999 everyone thought Philip Morris would fail... and it didn't. Also in 2003-4 many thought McDonald's is toast.)
For example, if I invested $1,000 in Lehman Brothers in 2007, I lost $1,000.
If I invested $1,000 in 3M in 2007, I broke even when I sold
But if I invested $1,000 into Microsoft in 2007, I have $15,000.
Note, these three examples ignore dividends received and allocated elsewhere from a risk management perspective. Those dividends shift the return expectations higher.
Back in 2007, it would have been impossible how each one would do.
Most of my investments won't be Microsoft, but most won't be Lehman either.
I expect to make most of my money on about 40% of my investments. The other 60% will likely end up break even on average.
I just do not know which one today will do great, and which one would falter.
Hence, my goal is to make sure I took my entry signal and not mess up with the compounding early on. (TL;DR - Stick to my process)
I sell rarely, because my audit showed me my sales have been a mistake, on average. I do it after a dividend cut, and if a stock is acquired. the longer i invest, the more inactive/passive in holding I try to be...
The main point behind the post could further be strengthtened with the example of Ronald Read, the janitor millionaire who died with a portfolio worth $8 Million at 92. He managed to amass his fortune with a patient, long-term, and disciplined approach that favored blue chip dividend paying stocks. One of his investments was Lehman Brothers, which resulted in a 100% loss. However, he also had 90+ other securities in his portfolio which helped him overcome this one big loss, and end up with a multi-million dollar portfolio regardless.
Ronald Read's story shows that can lose 100% on a single security in a diversified portfolio.
And still end up with $8 Million, because you are diversified and hold 100 companies.
Today we discussed a few important principles. First, focus on the big picture, and do not get lost in the weeds. Second, design a strategy with built in protections (e.g. diversify, and invest regularly). Third, stick to your strategy through thick or thin - that's how long-term wealth is accumulated. Fourth - you won't be right on every investment. But if you stick to it when you are right, you can make a lot in capital gains and dividends - it's potentially unlimited. And if you are wrong, the most you can lose is what you invested (sans any dividends received and invested elsewhere)