My Dad Was a Great Stock Picker. There Was Just One Problem
My dad is the greatest stock picker the world never knew about. Dare I say he’s even better than Warren Buffett.
He’s identified countless companies whose stock prices would later skyrocket. More importantly, he’s never lost a single cent on any of his picks.
His secret?
He never invested any money in any of the stocks he was so sure about because the risk of losing money terrified him.
Instead, I’ve had to listen to him react to news of his countless stock picks: “I knew that stock would go up. If I had bought that stock a couple of years ago, I’d be a millionaire.”
Sure, Dad. Sure.
MY DAD’S SCARCITY MINDSET
My dad's fear of losing money wasn't just about investing. It was a scarcity mindset—a belief that resources are limited and that losing what you already have is especially dangerous.
I’m positive my dad’s upbringing has everything to do with his risk aversion.
He grew up in the wake of World War II. This was a time when resources weren’t as easy to come by. There were no Walmarts on every corner where you could buy anything you needed.
Nothing was thrown away. That old shoelace and safety pin might come in handy one day. But throwing it away means losing it forever.
And the fact that his family was poor meant that tough times were always ahead. To compound matters, he lost his father when he was still a child. So his mother had to work long hours to put food on the table for him and his siblings.
I can imagine that when any treats were brought home, you had to move fast if you wanted your share. Siblings became competitors for limited resources.
Having grown up in that kind of environment, it’s no wonder my dad felt like there was never enough of anything. Never enough food. Never enough money. And when there’s not enough, losing what you do have is devastating.
But you can’t lose if you never play the game, right?
Well, not exactly.
By not buying the stocks, my dad was protecting himself from one very real possibility: losing money. What he couldn't see was what that protection was costing him.
YOU CAN AVOID LOSING MONEY AND STILL LOSE
All investments have risk. Even “safe” investments like CDs and treasuries have some risk.
Generally, investors expect to be compensated for taking on more risk. But higher risk doesn't guarantee higher returns. Sometimes it just means you have more ways to lose money.
And avoiding investment risk doesn't eliminate risk. You're simply trading one kind of risk for another.
THE RETURNS YOU NEVER EARN
My dad’s experience taught him to protect every dollar. And it’s not uncommon to see people sharing that scarcity mindset.
My wife’s experience, though, taught us something different: even a small investment can grow into something meaningful with enough time.
When she was still working, one of my wife’s work responsibilities was to onboard new hires. During that process, she would tell them about the company’s 401(k) plan. And for many, 401(k) plans were something brand new to them.
They would start off excited to learn how the company would match their contributions and how their money could potentially grow. But then they would balk when they learned it wasn’t risk-free. The possibility of losing money scared them.
Consequently, many of the employees she onboarded opted out of the 401(k) plan. To them, guaranteed money in the pocket today was more important than a potentially much larger—but unguaranteed—wallet in the future.
My wife, however, started contributing to her 401(k) plan as soon as she could. She was the lowest-paid employee for many years, making $16,000 a year in the early 2000s.
She made far less than even the people who said no to a 401(k) plan. But she still contributed what little she could with each paycheck.
We still have the oldest account statements from her 401(k) plan, and even today it’s exciting to see how it grew. Her account started with just a few hundred dollars. But she continued to contribute small amounts and let compounding do its thing. Eventually her account grew to six digits.
And it wasn’t a smooth uphill climb either. There were years when her account value stayed flat. Then there were years when it dropped—big time.
But in the long run, she came out ahead. Compounding returns and a long time frame smoothed out the dips and potholes.
INFLATION QUIETLY SHRINKS YOUR MONEY
My dad's instinct was to gravitate to “safe” places to keep his money. But dollars sitting safely in a risk-free savings account aren't necessarily staying safe in terms of what they can buy.
Sure, you might not lose any actual dollars, but the buying power of those dollars falls each year because of inflation. Trying to avoid investment risk can’t protect you from this loss of buying power.
Inflation is scary because it's usually not overt. When it was nearly 15% in 1980, it was hard to miss. A 15% jump in prices gets your attention.
But when inflation is 2% or 3%, it can be easy to overlook. A few percent of lost buying power each year sounds trivial. Except that it isn’t because inflation’s effects compound each year.
At 3% annual inflation, your money’s buying power drops by almost half every 20 years. That’s big, but even then you might not notice inflation.
Inflation is a little like finding an old grocery receipt.
You might remember that groceries used to feel cheaper, but you don't realize how much cheaper until you see the actual numbers. A $3 gallon of milk or a $1 loaf of bread can look almost absurd when you're used to today's prices.
That's the sneaky part about inflation. Prices don't suddenly double overnight. They creep higher, and we adjust. Then one day we look backward and realize just how far they've moved.
EVENTUALLY, YOU HAVE TO GET COMFORTABLE WITH LOSING
Every investor will lose money at some point. And the first time it happens, it’s scary.
In some ways, I inherited a little of my dad's fear of losing money. When I first started buying individual stocks, I could only afford to invest a few hundred dollars. I remember looking up the price every couple of minutes and feeling sick whenever it dropped.
It didn’t matter if the loss was only $25. It felt like getting hit in the gut by Mike Tyson and knowing he might not be done punching yet.
Since then, my investments have grown and so have the sizes of any losses. I’ve lost $18,000 on a $20,000 investment in a single stock before. I’ve even watched our portfolio fall almost $400,000 in a single year.
That’s a lot more than $25, but guess what? Those losses were much easier to stomach. Those occasional losses got easier over time, just like riding a roller coaster. Even the scariest roller coasters can feel tame after so many rides.
Fortunately, a long time frame works in your favor. And you don't even need every investment to be a winner. If you lose $1,000 on several investments but one successful investment gains $10,000, the overall portfolio can still come out ahead.
For an individual stock bought with cash and not on margin (i.e., with borrowed money), your downside is generally limited to what you invested.
For example, with a $10,000 investment, the most of your own money that you can lose is $10,000.
And until you sell your stock, it's an unrealized loss—a decline in the value of the investment on paper only.
On the flip side, there is no predetermined ceiling on how much the stock could rise if the company is successful.
CHANGING HOW I THINK ABOUT INVESTMENT LOSSES
I still think about my dad whenever I see a stock I wish I'd bought years ago.
Maybe he's right about some of those companies. Maybe he isn't. That's the thing about investing: nobody knows for certain what will happen next.
But I've learned that trying to eliminate the possibility of losing money isn't the same as making a good financial decision.
Sometimes the biggest risk is the one you don't see because you're busy avoiding all the others.
My dad's scarcity mindset taught him to protect what he had. And given everything he experienced growing up, I understand why.
But building wealth requires a different mindset. You have to accept that some investments will lose money. Some will disappoint you. And occasionally, one will make you question every decision you've ever made.
I now think of those losses as the cost of financial education. Some lessons cost $25. Others cost considerably more. But the important thing is that I learned from them.
Because you can't build wealth by making sure you never lose.
Sometimes, you have to be willing to lose a little to give yourself a chance to win a lot.
See you at the finish line!
Disclaimer: I’m not a licensed financial professional. This blog shares my personal experiences and opinions around money, investing, and early retirement. It’s for informational and educational purposes only—not financial, legal, or tax advice. Always do your own research or consult with a qualified professional before making any financial decisions.
Comments