Losing $30 Million Made Me a (Much) Better Investor

Last week, I posted something on X that was pretty personal.

I know I’ve shared stories with you before, but that’s typically about events that happened a decade or more ago. And while this one does involve my past, I just got quite the update on a saga that saw me lose more than $30 million.

Here’s what I wrote:

Believe it or not, we didn’t spend much time talking about the past. Instead, we talked about life: his health, our families, the remarkable coincidence that we now both have four grandchildren…

The conversation was personal, calm, and surprisingly comfortable. And before we hung up, I told him we should get together for lunch.

I truly hold no bad feelings against him. I don’t know if I’d go so far as to say I’m grateful for what he put me through, but it did put me in a position to learn some very valuable lessons.

Like most entrepreneurs, I spent a lot of time before that trauma thinking about how much money I could make. Afterward, I spent a lot of time thinking about how much money I could lose.

As it turned out, that was exactly the perspective change I needed.

Warren Buffett has a lot of famous sayings worth paying attention to. But perhaps his wisest words were these:

Or, as I like to write, protect your principal at all costs. Either way you put it, it’s all about keeping the capital you make.

I’m not saying this is the easy way. It involves a lot of time spent researching questions like:

And then, after I’ve evaluated all of that to determine the company’s quality, I next have to evaluate its price. Because even the greatest company in the world can be a terrible investment if you pay too much for it.

Leverage can be an enormously powerful tool in a business or entrepreneur’s toolkit. I learned that firsthand in my commercial real estate (CRE) development days.

Debt allows you to control large assets with relatively modest equity investments. In the case of CRE specifically, it can significantly enhance your return on equity as property values appreciate and cash flows expand.

But when things turn south, leverage just as easily magnifies downside risk. Refinancing maturing debt becomes expensive or even inaccessible far too quickly, leaving you responsible for paying back what you borrowed… even as your assets’ value declines.

Trust me. I know.

That’s why Wide Moat Research emphasizes balance sheet examination so strongly. It’s one of the first places we look when we decide to evaluate a company, including its:

We’re not playing games here. We even consider whether the company’s underlying assets justify the leverage being employed.

A 7% dividend yield doesn’t mean much if the business behind it can’t handle its debt. In which case, we want no part of it.

As I explained yesterday, errors and unexpected shocks are inevitable. There’s always some economic threat lurking around the corner. So companies need to be prepared to handle what may come, whether it’s a recession, a lost client, or a natural disaster.

I’m not saying they should be debtless. I just want to see that they can absorb setbacks with grace.

If you read yesterday’s article, then you already know what I’m about to say. So forgive me if I come across as repetitive.

But I want to make sure as many people understand this as possible considering the uncertain times we’re in right now. I don’t want anyone else to personally experience loss the way I did because I didn’t understand fundamental concepts like margin of safety.

This is when you look at an investment’s estimated intrinsic value alongside its share price, then buy it only if there’s a discount – enough of one to protect you from forecasting errors, negative market conditions, and other undesirable results.

The wider that margin of safety is, the more your principal should be protected.

Now, even the best margin of safety doesn’t mean you’ve got a risk-free setup. It only provides a buffer against unfortunate events, not a guarantee of success.

So let’s discuss when things don’t go right…

Major losses tend to produce major shocks, not only to our finances but to our good judgement as well. When we experience a major loss, our natural instinct is to make that money back as fast as possible.

As in yesterday, if not sooner.

That desperation can take over, pressing us to take big risks in the hopes of obtaining big rewards. Instead of regrouping and re-evaluating, we often double down on our errors.

Or we speculate.

Or we fall back on leverage to save us.

Take it from me though: When my business partner wiped me out and I had to rebuild my career, there was no quick fix. I had to tackle each day individually, no matter how exhausting or discouraging that day might be.

And you know what? Eventually, I paid off all my creditors and rebuilt respect in the CRE community.

Of course, then 2008 happened, and I had to start from scratch yet again. But I came back from that, too, with the same approach.

In that case, I started writing one article at a time. That commitment meant my knowledge compounded, as did my confidence, my business connections, and my profits.

Looking back, I can think of multiple “quick fix” options I could have pursued. And I’m so grateful I took the long way.

Honestly? I can’t imagine how much worse life would have been if I hadn’t.