How many of your shares should make money?

Do losses on the stock market feel like a dagger through your heart? Here's some advice on what to do.

| More on:
children dressed up in adult clothes at a bingo night with one child winning

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Those who started buying shares for the first time in the heady days of 2020 might have received a rude shock this year.

For many, it will have been the first time they saw their investments fall significantly. Some of their stocks might even be in the red.

This can be unsettling for rookies, but experts warn this is all part of investing.

In fact, if a person can't handle that some of their holdings might lose value then, arguably, they should examine whether they have the stomach for investing.

The world's most famous stock investor, Warren Buffett, warned last year that "some people are more subject to fear than others".

"If you can't handle it psychologically then you really shouldn't own stocks, because you are going to buy and sell them at the wrong time," he told the 2020 Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B) annual general meeting.

Forget 100%, a 60% win rate is excellent

So how do the professionals avoid losing?

The short answer is they don't.

Professional fund managers know better than anyone that they can't pick all winners. They realise that the most one can lose on each share is the invested amount, but the most one can gain is infinite.

So they'll settle for just getting it right the majority of the time

"To be perfectly honest, we target getting 60% of our decisions correct," Sage Capital portfolio manager Sean Fenton told Ask A Fund Manager this week.

"I don't think a lot of people realise because everyone does have a bit of a hindsight bias. You always think that knowing things is easier than it actually was."

Does it seem like 60% is a low goal? Well, it's not just Fenton that thinks this is an appropriate bar.

Famous US fund manager Peter Lynch once also declared "6 out of 10" to be an excellent strike rate.

"You're never going to be right 9 times out of 10."

Investors love remembering their wins and forgetting their losses

Fenton told The Motley Fool the trouble is that investors have "very selective memories" — remembering their wins and forgetting about their losses.

After all, when's the last time you heard at a barbecue a friend talk about their 30% loss?

But every share portfolio contains negative returns, like it or not.

"If you don't do the hard accounting and actually track your investment decisions and work out your wins and losses, people tend to overestimate their skill," said Fenton.

"But we do do that and if we can get 60% of our investment decisions right, it means we're absolutely knocking it out of the park."

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Berkshire Hathaway (B shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on How to invest

A man in his office leans back in his chair with his hands behind his head looking out his window at the city, sitting back and relaxed, confident in his ASX share investments for the long term.
How to invest

The potential pitfalls of 'buying the dip'

If you're thinking of buying a beaten-down ASX stock, read this first.

Read more »

A young man goes over his finances and investment portfolio at home.
How to invest

Thinking of selling your winning ASX 200 stocks? Think again

You could be sabotaging your returns.

Read more »

A couple cheers as they sit on their lounge looking at their laptop and reading about the rising Redbubble share price
How to invest

Building a $42,000 portfolio that could generate income forever

This is one way that investors could build a growing income from the share market.

Read more »

A young well-dressed couple at a luxury resort celebrate successful life choices.
How to invest

How to make $12,000 of passive income a year

Want to line your pockets with income without breaking a sweat? Here's how to do it.

Read more »

Cheerful boyfriend showing mobile phone to girlfriend in dining room. They are spending leisure time together at home and planning their financial future.
How to invest

Why $5,000 invested this way could grow substantially

Here's a simple but effective way to invest your money.

Read more »

Smiling woman with her head and arm on a desk holding $100 notes out, symbolising dividends.
How to invest

How to make $5,000 a month in passive income

Here's a quick guide how you can make a life-changing side income.

Read more »

man helping couple use a tablet
How to invest

How you could turn $10k into $100k with ASX shares

Here are the steps to take if you want to grow your wealth in the share market.

Read more »

A laughing woman wearing a bright yellow suit, black glasses and a black hat spins dollar bills out of her hands signifying the big dividends paid by BHP
How to invest

Become a multi-millionaire with these 5 ASX shares

Simple stocks can make you very rich if you give them enough time...

Read more »