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Seems that a lot of people agree that professional investors are better in investing than you and me or the so called amateur investors.

While this might often be the case there is literally tons of information out there about exactly the opposite being true. If you would like to know how an ordinary person can beat the professionals in their own game I would recommend to start from reading the classic One Up On Wall Street by Peter Lynch.

But that’s not what this post was supposed to be about.

While there is no doubt that an amateur can beat a professional there is also no doubt that there are people (usually professionals) who have an amazing track record. Peter Lynch and Warren Buffett are the first to come in mind. These are the people who have shown year after year that they can beat the market. For example Warren Buffet’s portfolio has grown an average of more than 20% per year.

With a rate like that it takes a little less than 4 years to double your money. The average return of the markets is widely believed to be about 12% . With a return of 12% you would double your money in a little less than 7 years.

The key point to agree upon here is

There are people who constantly outperform the markets.

The Average Joe

Let me ask you this. Have you ever lost money in the markets? Chances are that when you have done at least a few investments in your life you have lost money.

Now let me ask you another thing – Have you ever made back what you lost – in the markets?

I bet that the answer is NO. It is no for the majority of people.

For the average investor, investing is a sideline. When he takes a loss, he usually subsidizes his portfolio from his salary, pension fund, or other assets. If the average Joe has 1000 dollars less than his goal he will simply put a little more money aside each month to get back to the desired level.

The Master Investor

For the Master Investor investing is not a sideline – it is his life. So when you take a hit and lose a portion of your portfolio – you can’t subsidize it from your salary (because you only get paid when you make money). The only way to get the money back is to make it back in the markets.

I already mentioned the fact that if you lose 50% of your portfolio you will need to get a return of 100% on the rest in order to get the money that you lost back in my post about The winning investment habit number 1 – preserve your capital.

Consider this - if you lose 50% of your investment capital and you manage to achieve the average 12 percent a year return – it will take you a little less than 7 years to get back to where you were before the loss.

With Buffett’s average return of 24.4 percent it would take 3 years and 2 months and for George Soros with an average yearly return of 28.3% it would take 2 years and 9 months.

What a waste of time!

Isn’t it simpler to just avoid the loss in the first place?

So there you have it:

The biggest difference in the thinking patterns of highly successful investors and the not so successful ones is that for professional investors losing is not an option. If you lose then it will take a lot of time to get the lost money back. So you only invest when you are absolutely certain that you won’t lose it.

If you can’t subsidize your losses then your thinking shifts from “Make profit” to “Keep what you have and after that if possible make a profit”

So here you go – Only invest when you are certain that YOU WILL NOT LOSE YOUR MONEY.

The ideas from this post are derived from the book „The Winning Investment Habits of Warren Buffet & George Soros”.