How Smart Investors Learn From Losing - Andy Tanner, Del Denney

Smart investors view losses not as failures, but as invaluable educational experiences that provide critical lessons and lead to breakthroughs, emphasizing the importance of accepting risk, continuous learning, and maintaining a disciplined temperament.

• Embrace losses as essential learning opportunities, not failures.

• Prioritize continuous financial education and disciplined temperament.

• Maintain control over investments to avoid gambling and manage risk effectively.

Most investors avoid discussing losses, but the most successful ones study them to learn and grow, often turning setbacks into major breakthroughs. Accepting that losses are an inevitable part of investing is crucial, as even top performers like Steph Curry and Kobe Bryant miss often. True investing success comes from combining robust financial education with a disciplined temperament, allowing for manageable losses rather than catastrophic mistakes.

The Value of Losses

• 00:03:19 While most people fear losing money, losses are invaluable experiences in investing. Accepting that drawdowns and unsuccessful transactions are inevitable parts of the investment journey is fundamental to success. Just as athletes like Steph Curry and Kobe Bryant miss shots, investors must anticipate and learn to deal with losses, recognizing that the ability to miss exposes one to the ability to succeed.

• 00:07:31 Many A students, accustomed to perfection, struggle in investing because the market does not guarantee 100% success like academic tests might. While studying is important, temperament and consistent habits are equally crucial for proficiency in investing. Expecting perfection can be detrimental, and it is more important to strive for perfection while accepting that losses will occur.

Risks and Probabilities

• 00:09:44 Investing involves juggling three critical factors: reward, risk, and probabilities of success. The reward must be significant enough to justify any associated risk; otherwise, no risk is worthwhile. For example, some credit trades offer a 90% probability of success, meaning 10% of the time they will incur a loss, which must be anticipated and managed. Risk is directly related to control, where more control equates to less risk, and no control leads to gambling, which is almost guaranteed to result in losses.

Personal Investing Mistakes

• 00:12:43 Andy Tanner recounts an expensive mistake with an Apple credit spread trade, driven by greed and a lack of discipline. He increased his position size and went on a cruise without internet access, relinquishing control over the trade. This decision, ignoring the principle that 'no control is gambling,' resulted in a loss that wiped out a year's worth of profits, highlighting the critical importance of maintaining control and adhering to personal rules.

• 00:18:30 Another significant loss occurred when Andy invested with a group of seemingly successful individuals but failed to voice his concerns about two potential fatal flaws in the business, fearing he might 'look stupid.' One of these unexpressed issues ultimately caused the business's swift failure, emphasizing the importance of trusting one's own judgment and expertise, even when collaborating with experienced partners.

Lessons: Knowledge & Temperament

• 00:20:55 Investing mistakes generally fall into two categories: a flaw in education or a lack of proper temperament. Disregarding the necessity of financial education, much like professional training in other fields, is a common error, leading people to seek 'tips' rather than foundational knowledge. Moreover, emotions like greed and panic often lead to poor judgment, overriding what an investor knows better. Both knowledge and temperament are essential for transforming potentially devastating losses into manageable setbacks.