In 2007, I worked as a mutual funds advisor at ING. I thought I was a real hotshot and also started investing with my personal money. The first stock I bought was the company I worked for at the time.
Within a year, I lost 60% of my money because of the financial crisis of 2008. When that happened, I did what most people do: I stopped investing altogether.
That’s our usual response when we experience losing money on a venture, whether it’s a failed business or a market crash: We stop and we become afraid. And that’s normal. It’s what most people do when a market crashes (whether that’s stocks, commodities, crypto, and so forth).
But you can’t succeed if you get out of the game.
After losing a lot of money in the stock market, I studied how successful investors stayed in the game. And the one thing they all have in common is this: They’ve learned to lose.
This is something that separates the pros from the amateurs. A pro knows how to lose so they can keep going. An amateur loses and it’s game over.
Learn to accept loss
I like how Martin “Buzzy” Schwartz, a successful trader who made a lot of money in the 1980s, explained it in his book Pit Bull:
“Going for the knockout had made me a loser for nine years. Now that I’d developed a methodology that fit my personality, I was going to stick with it whether I was trading $5,000 or $500,000…
For two hundred days a year, I’d end up with reasonably small losses netted out with similar-sized gains. Lose $5,000 here, make $6,000 there, round after round, twenty, thirty, forty times a day. But I’d win the other fifty trading days by clear-cut unanimous decisions.”
Learning to lose is a skill. You take small losses, but you know what you’re doing, so you can keep going. And keep winning.
Financial setbacks are a natural part of life. A storm that damages your house, a pandemic, getting laid off, and so forth. It happens to everyone and at least one of these can happen to you. So don’t beat yourself up when you’re in a bad situation.
And don’t think, “I should’ve done this or that.” Learn from your mistakes and move on. Accept that bad things happen in life and it’s not always our fault. Cut yourself some slack.
The faster you acclimatize to your new reality, the better you’ll adapt. And you can start focusing on the things that really matter.
Stop emotions from taking over your finances
Making money comes with pain. There are always risks when we try to invest or create a side business. So the key to building wealth is managing your emotions.
And there’s usually a major payout when financial setbacks happen. Like a severance package when you’re laid off. Or claiming insurance benefits.
What should you do when you experience that type of loss? Do you invest it in the stock market? Maybe pay off your mortgage? Start a business? The best answer: Don’t do anything—yet. Leave your money where it is or put it in a money market account for now.
Never make huge financial decisions while you’re going through a stressful time. This makes you vulnerable to bad investments or costly mistakes. Your mental bandwidth is limited; you can only take a few things at a time.
So park that money somewhere safe. And then decide what to do with it when you’re emotionally and practically ready.
Financial health is everything
Look, you can talk about losing money all day long, but when you experience it, you just feel differently. You feel threatened. Because our livelihood depends on money, it’s not a weird response to feel a lot of fear.
In my experience, there’s only one way you can overcome that: Get in better financial shape.
Just like you’ll be able to lift more when your body is stronger, you’ll be able to absorb loss better when you’ve got your finances in order.
And financial shape is very straightforward: Avoid debt, save money, spend less than you earn, and invest in assets.
To me, getting out of debt is the most important thing. Because how do you save when you’ve got outstanding debts to pay? Which debts should you pay first? And should you pay off your debts first and save later?
It pays off to hire a financial planner or at least spend time on creating a strategy for yourself. You have to assess where you are to know where you’re going.
I wrote about getting rid of debt here. Once you’re out of debt and start saving money, you’ll instantly get better at dealing with small losses. You can start focusing on building actual wealth.
Don’t go for a knockout
I used to seriously train in kickboxing. When I started sparring, my instincts told me to knock my opponent out. But I always got my ass kicked for the first two years. When I switched to a gym that was run by a coach who had experience in the K1 (once the biggest kickboxing league in the world), I learned about strategy.
Some fighters have knockout power, but most don’t. You need to beat your opponent by a million papercuts. You keep hitting them with combinations and you defend as well as you can. Sometimes you absorb a few hits, but as long as you keep your distance, those hits (small losses) are manageable.
You don’t go for the knockout because you risk getting hit with a devastating counterpunch. And that’s what often happens with investing and money. You go for the knockout and you get hit with a massive counterpunch that defeats you.
That’s not a strategy. That’s gambling. And gambling won’t bring you sustainable wealth that gives you joy and peace of mind. Having patience and letting your money compound will.
Morgan Housel, the author of The Psychology of Money and partner at Collaborative Fund, said it best:
“Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.”
So no matter what type of financial opportunities you pursue, make sure you stay in the game. Avoid getting wiped out and you’ll keep growing your capital.