4 Things Billionaire Investors Have In Common – Part 1: They’re Obsessed With Not Losing Money!
This is part 1 of a four part series of short articles. Each article sets out to explain an important trait that billionaire investors have in common. The goal of these articles is to explain simple concepts that the best investors in the world use, that you can implement today. Success leaves clues and one of the best ways to learn is to deconstruct and reverse engineer what the best in the world do. So let’s get to it.
First off I want to mention that these articles were inspired by Tony Robbins’ book Money: Master The Game. The funny thing is that I actually haven’t read the book myself.
I listened to about half of the audio book version for free, but couldn’t find the second half. And I still haven’t bought the book. I guess I’m just too frugal (translation: cheap).
So what prompted me to write about a book that I haven’t actually read? Well, I came across interviews and articles where Robbins mentioned these four traits. And I felt they were so powerful, yet so simple, that they deserve repeating.
I love studying what successful investors do and I personally needed a quick refresher in all these traits. It’s so easy to get bogged down in specifics that we tend to forget the simple, but important, stuff.
And I’m sure that a lot of people will have a lot of different opinions on Robbins. Personally I am a fan. He is a strategist and his whole career has been dedicated to analyzing what the most successful people in the world do, then educating normal people about how to use those same strategies. I think that’s commendable.
But what you think of Robbins actually is not important because in his book he doesn’t give his own opinion on how to invest. He gets the information from the best investors in the world. As Robbins himself puts it:
“I interviewed more than 50 self-made billionaires, Nobel Prize winners, investment titans, bestselling authors, professors, and financial legends, asking every question I could think of about the art of building wealth.”
And what I really like is that the people he interviewed had a wide range of different investment strategies, people like John Templeton, Jack Bogle, Carl Icahn, Paul Tudor Jones and Ray Dalio, just to mention a few (in case you don’t know all these names, I suggest you google them).
But despite their different investing strategies they still had four important traits in common.
And the first trait is that “they are obsessed with not losing money” as Robbins put it. And he really emphasizes the word obsessed.
In a podcast interview that Robbins did with Tim Ferriss he says “it’s a level of obsession that’s mind boggling.”
One of the people Robbins talks about is Paul Tudor Jones, one of the most successful traders in the world (if not the most successful). Robbins has coached Tudor Jones for more than two decades, so he knows the guy well. On the topic of not losing money, Tudor Jones said:
“The most important thing for me is that defense is 10 times more important than offense . . . You have to be very focused on the downside at all times.”
Tudor Jones has an estimated net worth of $4.7 billion and I read that he hasn’t lost money for 28 years! I was fascinated to learn that he was so risk-averse, because he’s a trader, and trading is generally seen as very risky.
Another example of a billionaire who always focuses on his downside is Richard Branson. Many people might think Branson is a big risk taker since he is an entrepreneur (I used to think of him that way), but the first question Branson asks when considering a new business is “what’s my downside and how can I protect it”.
A good example is when he set up Virgin Atlantic. He had one plane operating on one route. And he had leased the plane with an agreement to hand it back to Boeing if it didn’t work out. So his downside was very limited.
Interestingly, most successful entrepreneurs don’t like to take a lot of risk. They try to minimize their downside, while maximizing their upside. This is the complete opposite to how most people view entrepreneurs. They are incorrectly thought to be big risk takers.
Now ask yourself, what’s your view on not losing money? If you’re anything like how I was, you are interested in protecting your downside, but your overwhelming focus is on maximizing your returns. If so, it might be time to become obsessed with protecting your downside.
But why is it so important not to lose money?
That might sound like a silly question because the answer is so obvious: losing money sucks. While that is true, there’s a much bigger concept underlying this question, and that’s compound interest – one of the most important concepts in investing. When you lose money, you lose out on the benefit of compound interest. Not only that, when you lose money you have to work twice as hard just to get back to zero.
So let’s look at some simple math to explain it.
If you own a portfolio of stocks and you lose 50%, you have to make 100% just to get back to zero. Even worse if you lose 75%, you have to quadruple your money to get back to zero. And just to add insult to injury, the market usually falls much faster than it climbs. So losing money is usually easy and quick, while making money is a long and tough road.
And let’s add some science to this discussion, just to make me seem more sophisticated. Research has found that the pain of losing money far outweighs the joy of making money. Investors approach the market with the goal of making a lot of money, all the while our brain is actually designed to avoid losses. Maybe it’s time to pay it some heed.
So I have now fundamentally shifted my main goal of investing. Rather than focusing on making money, my main goal is now to protect my downside. I suggest you do the same.
The great thing is that having this mindset actually takes a lot of the pressure off investing. Because if you change your goal from “make money and outperform the market” to “don’t lose money” you’ll feel less stressed. It’s an easier goal to achieve.
In fact, Warren Buffett has the same goal. Just consider his two rules to investing:
Rule 1: don’t lose money
Rule 2: don’t forget rule number one
When I first heard these rules I thought he was joking (because they’re a bit humorous), but I later found out he is dead serious. And that’s because he understands the power of compounding (Einstein called compounding the eighth wonder of the world).
Key Takeaway
Hopefully I have been able to convince you of how important it is to cover your downside first. You should become obsessed with not losing money. The best investors in the world are.
It’s an easy thing to do. Whenever you make an investment, ask yourself “what’s my downside?”, and try to avoid the temptation to think about all the money you can make (that’s your greed talking, and it can cloud your judgment. I’m talking from experience).
And before I close this article, I want to leave you with one last quote (I love me some quotes). It’s from billionaire fund manager Howard Marks:
“If we avoid the losers, the winners take care of themselves”
Until next time,
Lars Christian Haugen
Category: What's Going On?
