Errors and sometimes stupid investment decisions afterwards are part of every investor’s life. There will probably be hardly any investor who has always been right over the years and decades. Anyone who already hits the market with 60% of their stock selection in a diversified portfolio is considered excellent.
It is important, of course, that you learn from your mistakes. But that’s another topic. Because today we want to take a foolish look at how big mistakes are regularly expressed.
Sure, many investors will now think: A big mistake is to be so wrong that a share loses 100% of its value and the investment thesis is irreparably destroyed. Even if such an example is quite rare, Wirecard should prove that it is possible.
But, is this really the truth? I would say: No, a 100% loss in price is not necessarily your (or, more neutral, a) stupidest investment decision you can ever make. Why? A great question. Let’s discuss that a little more.
100% loss of course: not the stupidest decision?
Admittedly, a lot has to happen until a share loses 100% of its value. Anyone who tries to sit out as a long-term investor should have found a suitable exit point earlier. After all, there are reasons why the stock is corrected so strongly. So holding on couldn’t have been a clever decision.
The degree of damage is also relatively high. A loss in value of 100% says nothing more than: Your stake is gone, my friend. You are sitting on a 100% loss of course and have become poorer by your efforts. But I guess further explanations are not really necessary here.
There may be cases where such extreme performances were not foreseeable in advance. However, there have probably been signs. Or, as an investor, you overlooked something you should have paid attention to. Maybe not necessarily when buying the shares. But possibly later. As I said: A mistake has probably happened. But not necessarily the stupidest investment decision you can make in principle.
Despite the profit: This investment decision would be more stupid
No, in my opinion there is something else that is much stupid than having a stock with a high loss in the portfolio. Yes, even a 100% total loss: namely the premature closing of a fast-performing stock that would have much more potential in the long term. Seriously, is that supposed to be worse? Understandable if you think that now.
Yes, in my eyes that’s worse. Let’s say you sell a stock with a profit of 100%. This will definitely make you richer, no question about it. But what if you see in many years or decades: the stock would have increased tenfold? Or a hundredfold? In this case, you really wasted a lot of potential.
Losing such a performance hurts more than a total failure in my eyes. Firstly, because a tenfold increase would have thrown away about 800% return. Or 9800% return with a hundredfold increase. But also because there are not such long-term strong opportunities every day. And finding such a long-term promising, intact growth story is a significant stroke of luck. Especially if you identify them early on.
A share can therefore lose 100%. There is no question: this is painful. However, losses, which are part of investor existence and are lost in a diversified portfolio, cannot hurt as much as missed, possibly life-changing investments. As a Foolisher investor, this is something that should always be considered.
What that means for you
Don’t get me wrong: avoid losses. Above all, a total loss does not belong in your portfolio and if you can see signs of such a performance, it means nothing. The fact that such a performance is not the stupidest investment decision does not mean that it is not stupid.
The worst thing that can happen to you, however, is not to make full use of a life-changing investment, although you could recognize it early on. Whoever happens to that is really not to be envied. And yes, that’s the stupidest investment decision you can make as an investor.
The post 100% course loss? No, this is not necessarily your stupidest investment decision appeared first on The Motley Fool Germany.
Vincent owns shares of Wirecard. The Motley Fool does not own any of the stocks mentioned.
Motley Fool Deutschland 2020