There was a great article recently in the Australian Financial Review on entrepreneurialism.
The article is titled, ‘Accepting failure on path to success’.
It pretty much sums up the attitude that entrepreneurs (and investors) need when making business and investment decisions.
The article notes:
‘[Aussie business] the Loop has embraced the idea of “fast failure” when adding new features to the website. “In the early days, for the features that we’d come up with, we’d spend a couple of months building them and then launch them…Some were hugely successful and some our users didn’t use at all. Now we launch very basic versions and if anyone is bothered to use them, then we build them out. It’s about learning as we go.’
The article goes on, ‘Andy Fallshaw is similarly a fan of the “fail small and often rather than big and infrequently” model.’
The message to takeaway is the idea that failure is OK. It’s much better to fail early in a bad business venture rather than stringing the idea out for years and still ending up as a failure.
Share traders take this approach all the time. They’re usually only in a position for a short period. If they get it wrong, they aim to get out quickly and try their luck with something else.
The reason for doing this is that most share traders use leverage (using, say, $5,000 to control a $20,000 position). If a share trader using this leverage sees their shares fall 10% it means they’ve lost $2,000 (10% of $20,000), rather than just $500 for someone not using leverage.
Leverage makes a big difference so it’s important to recognise this and manage your trades accordingly.
Small-cap investing is different. In most cases you shouldn’t and won’t be able to use leverage. That’s because most broking firms won’t lend money for punters to invest in these high-risk stocks.
But the idea of accepting failure is just the same. You won’t win with every small-cap stock you back. But because the possible returns are so big you don’t need every stock to be a winner.
The point is, with this type of share investing you must accept failure. We know that can be a hard concept to grasp, but it’s important to understand that when you’re investing in speculative stocks they’re usually a long way from making money. There’s a lot that needs to go right in order for the stock price to go up.
But for those companies that do get it right (whether it’s through luck, skill or a combination of both) that’s when you can collect the big money-in-the-bank gains.
Kris Sayce
Editor, Australian Small-Cap Investigator
From the Archives…
Why You Should Wish For a Falling Market
2012-06-08 – Greg Canavan
Why the U.S. Dollar is Really Rising
2012-06-07 – Keith Fitz-Gerald
How This Bear Market Could Last Another 18 Years… Just Like Japan’s
2012-06-06 – Kris Sayce
The Banking Plan That Could Be A Game-Changer for Gold
2012-06-05 – Dr. Alex Cowie
Best Investment Strategies For the Times Ahead
2012-06-04 – Nick Hubble
Accepting Failure A Key to Success in Business and Share Investing