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

Key Concepts

• Losses as Learning Opportunities: The central theme is that losses in investing, while feared, are crucial for growth and breakthroughs.
• Acceptance of Losses: Successful investors accept that losses are inevitable and a part of the process.
• A-Student vs. C-Student Mentality: The difference in approach between perfectionist "A-students" and pragmatic "C-students" in investing.
• The Three Balls of Investing: Reward, Risk, and Probability are the key elements to juggle in any investment decision.
• Risk and Control: Risk is directly proportional to control; less control equals more risk, and no control equals gambling.
• Mistakes vs. Losses: Differentiating between a genuine mistake (due to lack of knowledge or discipline) and a loss that resulted from a well-executed strategy with inherent risk.
• Criteria-Based Investing: Making investment decisions based on a set of predefined criteria, similar to a basketball player taking a good shot.
• Knowledge and Temperament: The two primary pillars for successful investing, with a lack of either leading to significant mistakes.
• "Learn Before You Earn": The importance of acquiring knowledge and education before risking capital.
• Actionable Resources: Emphasis on utilizing free and paid resources to gain financial education and take action.

The Power of Losses in Investing

This episode of Rich Dad Stockcast features Andy Tanner, a Rich Dad expert, discussing the often-avoided topic of investment losses. The core argument is that while most investors fear and hide their losses, the most successful ones study them, learn from them, and often find their biggest breakthroughs through these experiences.

The Inevitability and Value of Losses

Andy Tanner emphasizes that experiencing losses is not a sign of failure but a critical component of long-term investing success. He draws parallels to sports, noting that even elite athletes like Steph Curry and Kobe Bryant miss a significant percentage of their shots. The ability to miss, he argues, is what exposes one to the possibility of making shots.

• Key Point: Investors who avoid clicking the mouse due to a desire for guaranteed success will never truly invest.
• Analogy: Steph Curry misses more than he makes, yet he is considered one of the greatest shooters. This highlights that a high miss rate is compatible with success if managed correctly.
• Supporting Evidence: Warren Buffett often begins his annual letters by detailing his mistakes, underscoring the importance of acknowledging and learning from them.

The A-Student Mentality and its Dangers

The discussion contrasts the "A-student" mentality, which seeks perfection and 100% success, with a more pragmatic approach. While A-students may excel in academia, their pursuit of perfection can be detrimental in the real-world application of investing.

• A-Student Trait: Desire to get 100% on tests, practice trading perfectly in paper accounts.
• Danger: Academia is about competency, but professional investing (proficiency) requires accepting that one will not "bat a thousand." Perfectionism can lead to fear of taking action or an inability to handle inevitable setbacks.
• Perspective: While there's nothing wrong with striving for perfection, expecting it is different from striving for it.

Personal Loss: The Cruise Ship Trade

Andy Tanner shares a significant personal loss from a trade that didn't go as planned, illustrating the consequences of a lack of discipline and control.

• Trade Details: Trading Apple with basic credit spreads.
• Mistakes Made:
  1. Greed: Increased position size beyond the intended allocation due to previous successes.
  2. Lack of Control: Took the trade on a cruise where internet access was unavailable for five days, preventing any adjustments or monitoring.
• Key Lesson: "Risk is related to control. More control, less risk. Less control, more risk. No control is gambling."
• Outcome: The trade was "very expensive," costing significantly more than the cruise itself and wiping out a year's worth of profits from Apple options trading. This was a "lack of discipline as much as it was a lack of education."

Other Investment Losses and Lessons Learned

Tanner broadens the discussion to other asset classes and business ventures, highlighting recurring themes in his losses.

• Real Estate: Experienced a freeze in syndication distributions during COVID-19, which he doesn't classify as a loss but a temporary pause in payment while still owning the asset.
• Starting Businesses: Lost money in early business ventures due to a lack of experience, which he now sees as gaps in his "Business Investor Triangle."
• Investing with Others: Lost money rapidly by investing with a group of successful individuals whose business model had flaws he recognized but failed to voice due to a fear of looking stupid or questioning their expertise. This was a disservice to them and himself.
• Categorization of Losses:
  1. Flaw in Education: Investing in areas beyond one's knowledge ("above our pay grade"), disrespecting the need for education.
  2. Temperament Issues: Mistakes driven by human nature, particularly greed and panic, leading to a lack of judgment.

Differentiating Losses from Mistakes

A crucial distinction is made between a "loss" and a "mistake." Not all losses are mistakes, and understanding this difference is key to learning.

• Mistake: A loss resulting from a lack of knowledge, discipline, or control (e.g., the cruise ship trade). These are devastating if repeated.
• Loss (Not a Mistake): A loss that occurs despite following a sound strategy and criteria. This is akin to a basketball player missing a good shot.
• Basketball Analogy: A good shot is determined by criteria: being open, on balance, within range, a team shot, and appropriate for the time/score. If these criteria are met, the shot is good, regardless of whether it goes in.
• Application to Investing: If an investment fits predefined criteria, including risk management, then a loss is not necessarily a mistake. It's a calculated outcome within an acceptable probability.
• Examples:
  • Hedging a portfolio and losing money on the hedge when the market goes up is not a mistake; it's the cost of insurance.
  • Drilling a dry hole in oil exploration, after thorough research, is not a mistake; it's a probabilistic outcome.

The Pillars of Smart Investing: Knowledge and Temperament

Tanner reiterates that significant mistakes in investing typically stem from a deficiency in either knowledge or temperament.

• Knowledge: The understanding of investment criteria, risk management, and asset classes. "Learn before you earn" is paramount.
• Temperament: The emotional control and discipline to adhere to the learned knowledge, avoiding greed and panic. This is exemplified by the calm demeanor of investors like Warren Buffett and Charlie Munger.

Resources for Learning and Action

The episode concludes by directing listeners to resources for further financial education and action.

• Paid Resource: "Zero to Cash Flow" class on Rich Dad for $100, designed to establish an income stream.
• Free Resources: stockcastbonus.com offers free webinars, downloads, and ebooks for "action takers."
• Call to Action: The hosts strongly encourage listeners to take immediate action by visiting stockcastbonus.com and engaging with the provided resources, emphasizing that "doing nothing brings no wealth and doing something brings wealth."

Conclusion

Losses are an integral part of the investing journey, not an endpoint. By treating every loss as a "tuition payment" for education, investors can become smarter, sharper, and better prepared for future opportunities. The key lies in acquiring knowledge, developing discipline, and understanding the difference between a calculated loss and a costly mistake.

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Summary of Andy Tanner's Discussion on Investment Losses

This summary details Andy Tanner's insights on the role of losses in investing, as presented on Rich Dad Stockcast. The core message is that embracing and learning from losses is fundamental to becoming a successful investor, rather than avoiding them.

The Inevitable Nature and Educational Value of Losses

Andy Tanner asserts that losses are an unavoidable aspect of investing for anyone involved for a significant period. He likens this to sports, where even the best athletes, like Steph Curry, miss a substantial number of shots. The crucial takeaway is that the ability to miss is what allows for the ability to make. Investors who are paralyzed by the fear of loss will never take action.

• Key Point: The best investors don't just focus on wins; they meticulously study their losses.
• Supporting Evidence: Warren Buffett frequently begins his annual letters by detailing his investment mistakes, highlighting their importance in his learning process.

The "A-Student" Mentality and its Pitfalls in Investing

The discussion contrasts the perfectionist "A-student" mindset with a more pragmatic approach. While A-students excel in academic settings where perfection is achievable, this can be a hindrance in investing.

• A-Student Trait: A desire for 100% accuracy and a perfect track record.
• Danger: In professional investing (proficiency), one cannot "bat a thousand." Expecting perfection can lead to fear of taking action or an inability to cope with inevitable setbacks.
• Distinction: Academia focuses on competency, while professional investing requires proficiency, which includes accepting a degree of imperfection.

A Personal Case Study: The Cruise Ship Trade

Andy Tanner recounts a significant personal trading loss that stemmed from a combination of greed and a critical lapse in discipline.

• Trade Context: A credit spread trade on Apple that had been performing well.
• Mistakes:
  1. Greed: Increased the position size beyond the planned allocation due to prior successes.
  2. Lack of Control: Embarked on a cruise with no internet access for five days, rendering him unable to monitor or adjust the trade.
• Core Principle Illustrated: "Risk is related to control. More control, less risk. Less control, more risk. No control is gambling."
• Consequence: The trade resulted in a substantial financial loss, wiping out a year's worth of profits from Apple options trading. Tanner labels this a "lack of discipline as much as it was a lack of education."

Broader Lessons from Investment and Business Losses

Tanner extends the discussion to other asset classes and business ventures, identifying recurring themes in his past failures.

• Real Estate: Experienced a temporary freeze in syndication distributions during COVID-19, which he views not as a loss but as a pause in income while retaining ownership of the asset.
• Entrepreneurship: Lost money in early business ventures due to inexperience, which he now recognizes as deficiencies in his "Business Investor Triangle."
• Collaborative Investments: Lost money quickly by investing with a group of successful individuals whose business had identifiable flaws that Tanner failed to voice due to a fear of appearing unintelligent or questioning their expertise. This led to a disservice to both himself and the partners.
• Categorization of Major Investment Errors:
  1. Educational Deficiencies: Engaging in investments beyond one's knowledge base ("above our pay grade") and disrespecting the need for thorough education.
  2. Temperamental Flaws: Decisions driven by emotions like greed and panic, leading to poor judgment.

The Critical Distinction: Losses vs. Mistakes

A key distinction is made between a "loss" and a "mistake." Not all losses are mistakes, and understanding this difference is vital for learning.

• Mistake: A loss that arises from a lack of knowledge, discipline, or control. Repeated mistakes are detrimental to long-term success.
• Loss (Not a Mistake): A loss that occurs despite adhering to a sound strategy and established criteria. This is analogous to a basketball player missing a well-executed shot.
• Basketball Analogy: A "good shot" is defined by specific criteria (openness, balance, range, team play, game situation). If these criteria are met, the shot is considered good, irrespective of whether it goes in.
• Investment Application: If an investment aligns with predefined criteria, including robust risk management, then a loss is not necessarily a mistake. It's an acceptable outcome within a probabilistic framework.
• Examples:
  • Losing money on a hedge when the market rises is not a mistake; it's the cost of protection.
  • Drilling a dry hole in oil exploration, after conducting thorough research, is not a mistake but a probabilistic outcome.

The Two Pillars of Successful Investing: Knowledge and Temperament

Tanner reiterates that significant investment errors are typically rooted in a deficiency in either knowledge or temperament.

• Knowledge: The understanding of investment principles, risk management strategies, and the specific asset classes being traded. The principle of "Learn before you earn" is paramount.
• Temperament: The ability to maintain emotional control and discipline, adhering to learned knowledge and avoiding impulsive decisions driven by greed or panic. This is a hallmark of highly successful investors like Warren Buffett and Charlie Munger.

Recommended Resources for Financial Education

The episode concludes by directing listeners to valuable resources for enhancing their financial literacy and taking action.

• Paid Course: The "Zero to Cash Flow" class offered by Rich Dad for $100, designed to help individuals establish an income stream.
• Free Resources: stockcastbonus.com provides free webinars, downloadable tools, and ebooks for individuals committed to taking action.
• Call to Action: Listeners are strongly urged to visit stockcastbonus.com immediately after the podcast and engage with the available resources. The hosts emphasize that "doing nothing brings no wealth and doing something brings wealth."

Concluding Synthesis

Losses are not merely a part of investing; they are a fundamental component of the educational process. By viewing each loss as a valuable "tuition payment," investors can gain wisdom, sharpen their skills, and become better prepared for future opportunities. The key to navigating losses effectively lies in acquiring comprehensive knowledge, cultivating strong discipline, and discerning between a calculated loss and a preventable mistake.