Winning the Investment Game by Not Losing
A lost decade for the S&P 500 proves that defensive investing and avoiding capital loss is the most reliable path to long-term success.
Ben Graham (Warren Buffett’s early mentor and teacher) said that the first rule in investing is to never lose money. And the second rule is to never forget the first rule.
To satisfy my own curiosity, I looked back at the S&P 500 index’s returns from 2000 through 2023 (with dividends reinvested) and then ran a hypothetical scenario. In the scenario I took all the years in this period where there was a negative return, and I simply replaced them with a return of 0%. Certainly not the return any investor is looking for, but far better than a loss.
The 6 years that a loss occurred during this period were 2000-2002, 2008, 2018, and 2022. See below where I compare the actual S&P performance (right) with the scenario I created (left) where all negative years were replaced with break-even figures. The returns at the end are based on $1 being invested at the beginning of year 2000.
This is a powerful illustration as to how impactful a permanent loss of capital can be to an investor’s rate of return over time. Simply by changing the years with negative returns to break-even returns, we end up with more than 3x more value at the end of the period.
Below shows the cumulative value of this original investment of $1 in 2000 ran through both scenarios (right-actual, left-hypothetical). To me, this is an even better visual of the impact of losing money as it shows how long it takes to crawl out of a hole after a losing year.
The dot com bust in the early 2000’s had a major impact on pretty much all stocks as you’ll see with 3 consecutive losses in 2000-2002. It wasn’t until some time in 2006 that the original investment of $1 regained the value it had lost. This gain was short-lived though, as 2008’s crash brought the investment’s value down to a figure far lower than the original investment.
Had you invested $1 in 2000 and held it until the end of the decade, you would be $0.09 poorer than when you made the investment a decade prior, making this a lost decade. However, had you figured out how to break even for these 4 losing years (2000-2002, 2008) you would end up with $2.32, more than doubling your investment over the decade.
Why I believe defensive investing is the superior path
The 2000 Baltimore Ravens are the perfect analogy for defensive investing. Their defense was historically dominant—a force of nature that broke records and terrified opposing teams. Their offense, on the other hand, was famously mediocre. The team was so bad at scoring that at one point, their offense went five straight games without scoring a single touchdown.
Despite this glaring weakness, they won the Super Bowl.
How? By playing not to lose. Their strategy wasn't to win with a high-flying offense, but to eliminate the possibility of a loss. By consistently forcing turnovers, holding teams to single-digit scores, and giving their own offense countless opportunities, they made it nearly impossible for their opponents to win. They didn't need to be flashy or score a lot of points; they simply had to avoid losing.
This is the essence of defensive investing. You don't need to chase high-flying returns or market hype to win the long game. By focusing on asset protection and avoiding capital losses, you can consistently outperform those who are only playing for the upside. You won't have the flashiest returns in a bull market, but you'll be the one left standing when everyone else has been wiped out by a losing year. And in investing, just like in football, avoiding a loss is the most reliable path to victory.
In most games, playing “not to lose” is the wrong approach. But in investing I believe this is the best approach. Perhaps I’m biased because I am wired to like boring things such as real estate and financial companies, but the tables above illustrate how powerful it can be when you eliminate losses. And my opinion is that you do that by focusing on asset-heavy, boring companies.
You won’t have many 100-baggers, but you also won’t have many wipeouts. And avoiding wipeouts is the name of the game.
Defensive investing also allows you to play offense when everyone else gets defensive/fearful. If/when this occurs, there will likely be bargains available for those that are patient. But for those chasing hype, AI stocks, momentum, etc. the result is likely that they are scared to take action when the market drops due to losses they’ve suffered as everyone rushes for the exits in the land of hype-stocks.
Moral of the story is to stay rational and stick with boring companies!
Important: This information is for general purposes only and is not financial advice. Always seek professional guidance for investment decisions.