The Art of Not Losing Money

Part One

“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1”

–Warren Buffett

Follow these directions on your road to safety

Let’s take a moment and step away from technical analysis, stock tips, and high finance.  Let’s talk about something that’s not quite as ‘sexy’ but is infinitely more important in your day-to-day dealings as an investor.  Cash management and safety.

According to full-time trader and author Karl Denninger, “Return of capital is more important than return on capital.  Put another way, the first rule of investing is “don’t lose money!”  Everyone wants to chase a winner; this, unfortunately, is why most investors lose compared to the markets over time.”

The first thing an investor must master is The Art of Not Losing Money.

Most investors only focus on the possible gains to be made. Learning not to lose money sounds boring and we all want to make the big bucks when investing, but the fundamental skill that you must have as an investor is the ability to protect your capital and the patience to wait for the right opportunity in which to invest that capital.  Any full-time trader (or professional gambler for that matter) will tell you that it’s fine to have the know-how, but if you don’t have a bankroll—you’re out of the game!

Most investment books and magazines will have plenty of articles about investment strategies, investment gurus, and investment advice.  Few will tell you the naked truth—without something to invest, you will never be able to take advantage of the opportunities that come your way.

Karl Denninger feels that it’s “… fine to speculate with money you can afford to lose, but your core capital should never be exposed to a market that is trading on bubble economics unless you’re close to the door and can leave fast – and for most investors that’s not possible with their “long-term” funds.  The key to long-term outperformance (the real goal in any such portfolio) is to STAY OUT during times like this, and take advantage of long-term (and deferred) tax advantages during periods when the markets are trading on fundamental value.”

Think about this for a minute:  If you lose 50% in the market, you need to get a gain of 100% just to get back to even.  How often will the market go up 100%?  It will likely take many years.  But, if you lose 20% in the market, it only takes a 25% gain to get back to even.  20% is still a lot, but a 25% rebound in the market is certainly a reasonable expectation and can be achieved in one year’s time.


The Oracle of Omaha

Managing your cash really boils down to discipline.

Just remember that as an investor, your bankroll is your lifeblood. Without it you can’t invest – it doesn’t get any simpler than that. Despite this simple truth, many people don’t see mastering The Art of Not Losing Money as a skill of the same importance as being able to calculate ROI or analyze emerging markets. All the investment strategies and hot tips in the world don’t mean anything, though, if you don’t have money to invest.

About the Author

Anthony Sills, M.B.A. formerly traded FOREX from the Atlanta Financial Center and has worked for stock advisory services, brokerages, Fortune 100 companies, and national banks.  Mr. Sills is currently a licensed loan officer and freelance writer.  You can reach him at anthony@professionalpenwriters.com.





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