My friend Michael Tennant is visiting Austin for SXSW. We got to talking about the market over dinner and Michael mentioned that he’s been seeing a lot of red in his account the last few days (and it’s not just him; U.S. stocks have taken an absolute beating over the past week).

Michael said that once upon a time, he would have panic sold out of his positions, but now, his emotion was acceptance and that he understood that taking some losses is inevitable when it comes to investing.

So, too, is it in life.

Everyone Who Plays the Game Loses (sometimes)

Any game that we choose to play, we are going to lose sometimes, especially if it’s a game we’re supposed to be playing.

There’s this quote from basketball legend Michael Jordan:

“I've missed more than 9,000 shots in my career. I've lost almost 300 games. 26 times, I've been trusted to take the game-winning shot and missed. I've failed over and over and over again in my life, and that is why I succeed.”

Bold emphasis mine. Jordan’s main message is about having the guts to try and fail, which is a message I endorse, but the part I want to focus on is the inevitability of eventually losing, any game that actually matters.

It’s possible to have a 100% win rate in an endeavor. I used to play a video game called StarCraft, and on one account I had a 93-0 record before I took my first loss. Was it because I was exceptionally skilled at that game? No. I was good at that game, but my friends and I basically stacked the deck by arranging 3 versus 3 matches where three of us knew each other and had a predetermined strategy, against three random opponents that didn’t know each other. When I played in matches against other organized teams, my win rate was much closer to 50%.

That 93-0 record wasn’t a real record. That was me playing not to lose. When I started playing against opponents with comparable skill and coordination, I started taking losses in rapid succession. Didn’t feel good! But at least it meant that I was no longer playing too safe or playing in the wrong league.

If Michael Jordan wanted a 100% win rate, he could have gotten it by dunking on kindergarteners.

Some Losses Need to be Cut

I want to return to markets. In investing, not all losses are equal—with some losses, the right move is to hold through the pain, while other losses need to be cut.

Fear is the enemy in both cases. Michael’s instinct, some years ago, would have been to panic sell in the face of current stock market volatility, out of fear of losing even more. But he’s decided to hold. (Aside—this is not financial advice—I have thought for some time that the stock market is quite overvalued.)

At other times, we hold positions that are bad positions we never should have been in to begin with, and we need to get out. If we are playing at the level of difficulty we are meant to be playing, losses and mistakes are inevitable. And sometimes we need to acknowledge our bad decisions and move on.

Each of us has had an experience where we “invested” in a bad job, a bad venture, or a bad relationship. The pride and ego of admitting a mistake, or the fear of being alone, or the fear of how we will survive without the security of the job (even though it’s bad), can keep us locked in a losing trade for a long time. When we hold on to a “loser” for too long, not only do we lose time, but we also lose the capital (energy, attention) that we could have redeployed into a better investment opportunity. Ultimately, what matters—when we accept that losses are inevitable—is the ability to distinguish between losses that are part of playing the game at a high level (Michael Jordan in the NBA) and losses that are millstones around our necks (imagine Michael Jordan with a bad teammate or coach).

Those losses have to get cut.

Holding Through the Losses and Letting Compounding Work Its Magic

I want to bring this back to the power of compound interest.

The greatest returns in life come from staying invested in one thing—a relationship, a career, a creative project, a fitness goal, a spiritual path—over a very long period of time.

When 1) we accept that losses are inevitable in any endeavor of real consequence, and 2) we learn to discern between natural losses from market volatility and big-time losers that will destroy us if refuse to cut them, we have to 3) learn how to hold on through the pain of temporary drawdown and let the power of compounding do its work.

This is why the conventional wisdom on investing is just buy and hold, or invest a bit every month and never look at your account. The weight of the compounding math is so powerful that even if you have multiple stock market crashes over the course of a 40-year investing career, chances are that you will still have a ton of money left at the end.

The core lesson here is that losses are inevitable but they are only disastrous if you handle them incorrectly. We need to stick with things that will recover and cut the things that are fundamentally broken. For example, writing this blog—I have posts that are probably stinkers (a loss) but that doesn’t mean that writing these notes is a fundamentally broken project. I just need to trust the process and let my writing compound.

Where in your life do you need to accept some losses, and trust your process?

Exercise

Journal on the following or discuss with a friend.

1)      Noticing

Where in life am I playing the game on easy mode? Is there an area of career, relationships, or fitness where I am playing at too low a level—the figurative “100% win rate”?

(Note that there is nothing inherently wrong with low-risk, safe, steady financial investments, as long as they are properly calibrated to your overall long-term investment objectives. I am not advocating for people to go out there and take risks until they have lost 50% of their money.

Nothing wrong with easy, pleasant, low injury-risk exercise like walking either. Just saying that we need to push ourselves a little bit in this arena too.)

2)      Discernment

Where in my life am I taking losses as a natural consequence of playing in a league of difficulty appropriate for my skill level, and where in my life am I hanging on to losses that are “energetic vampires” that drain my time, vitality and capital?

If I have those losses that need to be cut in my life, what would the process of realizing those losses look like?

3)      Action

If I’ve got a 100% win rate as a consequence of playing in the little leagues, what can I do to play the game against stiffer competition?

If my time, energy, and money are being drained by a bad bet—which is a natural consequence of playing difficult games!—what is the smallest step I can take towards cutting one of those losing trades?