Note: The theme of this post, not it’s language, is inspired by Nick Murray’s excellent book on investing, Simple Wealth, Inevitable Wealth.

There’s not a lot everyone can agree on, but I think we can all agree that a billion dollars is a lot of money (unless you’re in the federal government).

Take a look at this number, read it out loud, and let it sit with you:

$6,200,000,000

That, my friends, is six BILLION, two hundred million dollars.  More money than most of us will ever see or possibly even comprehend in our lifetimes.  Suffice to say, it would be difficult to spend that much money in a lifetime.

To help us understand how much money this is, think of it this way:  If you had $6.2 billion dollars, you could spend $10,000 every hour for the next 50 years ($87.6 million every year), and still have almost $2 billion left over.  Like I said, more money than you could spend in a lifetime.

Now, think about if you lost this much money.  Most of you would poop your pants, scream, and go into hiding.  That’s probably what I’d do, because I would think my life is over.  Maybe you’d look at your computer screen with a blank stare, and a little dribble of drool coming out your mouth because you don’t quite understand.

But you want to know what Warren Buffet did when he actually did lose that much money?  Nothing.  He didn’t poop his pants, he didn’t scream, and he didn’t run away.  He didn’t do anything.

How was he able to keep his composure when he was losing more money than we could understand?  He understood that you only really lose if you sell out.

Here’s how it all went down.  In 1998, the total value of Buffet’s personal holdings in Berkshire-Hathaway declined $6.2 billion during a serious market decline, in which the S&P 500 lost 19% of its value over the course of 45 days.  Russia had defaulted on its debt, and there was truly a [short-lived] global panic.

Throughout all this, Buffet knew a few things that allowed him to keep his cool and regain all of the money he “lost” during that month-and-a-half:

1) He knew that Berkshire-Hathaway wasn’t going bankrupt, so his investment wasn’t going to zero.
2) He knew that the only way to lock in your losses was to sell while everyone was screaming.
3) He knew deep down that, over time, the market hysteria would end, and the market would recover, like it always has.

What happened when he lost that money?  His net worth took a hit for a time, then it recovered over time as he HELD ON to those investments.  He didn’t panic, and he didn’t sell.  In the end, how much did he lose?  Nothing.

Your ability to be a successful equity (stock) investor depends on you understanding those three principles Buffet knew:

1) While individual companies have gone to zero, the market has never gone to zero, so your diversified investment in ETF’s or traditional mutual funds won’t go to zero.
2) The way to lock in your losses is to sell when everyone’s screaming.  Alternatively, if you want to grow, just hang on, and keep investing when things are going down.
3) With time, the market will recover, like it always has.

If you don’t believe that third principle, then I would encourage you to save yourself the stress and heartache and just go invest in gold.  It will be extremely volatile but when the stock market drops you can rub your gold bars and be happy you’re not riding it. Unfortunately, you have little hope of being a successful equity investor.

If you understand those three principles, you have a good chance of becoming (and staying) a successful equity investor for the long-term, which is the only way to invest.  Happy investing.

For an even better analysis of this story’s implications for the average investor, I highly recommend the book Simple Wealth, Inevitable Wealth by Nick Murray.