I writing a topical email every week to my mailing list but I thought I share the last email with everyone as it really resonated with me.
Q3 hedge fund letters, conference, scoops etc
Rule No. 1: Never lose money.
Rule No. 2: Never forget rule No. 1.
– Warren Buffett
2019 has rolled right in and many people are busy setting the yearly goals. Many of these goals will inevitably involve making money.
While its important to focus on these things, I thought I start this year’s email by talking about something less popular but far more important – not losing money in the first place.
One of the unique things about value investing (Warren Buffett’s investment framework as taught by his teacher Benjamin Graham) is that it spends a lot of its time talking about loss avoidance and thinking about potential downsides.
This is quite unique – after all most investments like to concentrate on the good stuff – the money to be made.
While making money is exciting and thrilling, not losing it is as important.
If you lose 25% of your money permanently, you need to make 33.3% to breakeven.
If you lose 50% of your money permanently, you need to make 100% to breakeven.
If you lose everything… well you get the idea.
Over the last few years – there were plenty of things where these losses were very real.
Oil and gas bonds in Singapore in 2016 and 2017. Crypto-currencies in 2018. Gold scams. And all sorts of fanciful forex and ponzi schemes that never made the headlines but were very real.
There’s a very real difference between price volatility in the stock market and taking a permanent loss because something literally went to zero (fraud or financial distress) or you got margin called.
Simple rules to live by
Plenty of money that was lost was easily avoidable by the cautious investor.
If something sounds too good to be true, it normally isn’t.
Here are my list of red flags that should get you skeptical:
- “Guaranteed returns”
- Exciting overseas stories that aren’t verifiable
- Promise of double digit returns every year
- Investments that promise no volatility and high returns
- When you hear someone“Trust me”.
Probably the most expensive words you will hear in your investing journey
The award for most ridiculous thing which came across my desk was probably the fund fact sheet of a cryptocurrency fund which offered triple digit annual returns over the coming five years.
There’s no substitute for education and experience
Unfortunately most investors will have to be burned several times before they realise that there is really no substitute for doing your own due diligence.
No one is going to care more about your money than yourself.
As the saying goes – it is always important to learn from your mistakes.
My personal motto is that it’s far better to learn from the mistakes of other people.
One of the reasons I started writing was to share some of these learning points and lessons from studying other successful investors and businessmen.
I picked up a copy of Warren Buffett’s biography in 2010 and The Intelligent Investor (by his teacher, Benjamin Graham) and never looked back.
Many of these investors too made plenty of mistakes (Warren Buffett included). Even Graham himself lost almost 70% of his money in the Great Depression as a result of margin (borrowed money).
He stuck it out, made his investors whole and from the ashes of defeat wrote his best selling book that encompassed the lessons he took from his near death experience.
The key thing was that these mistakes were not fatal to their overall journey, and they were able to learn from them and adapt to become better investors.
One of the reasons why I am very against the use of leverage is that it amplifies your decisions – good or bad. Inevitably we are bound to make mistakes and leverage can turn a bad situation into a fatal loss.
The great thing about the last decade is the sheer explosion of great material from the best and most successful of investors sharing their life lessons.
I’ve benefitted immensely too, and that was my initial inspiration for writing so I could both better articulate my thoughts and also to share what I learnt.
2019 will be an exciting year
Over the coming year, I will be looking to roll our new educational initiatives and hopefully finally publish my long delayed book.
Wishing everyone all the best the coming year in all things!
Article by Jun Hao, The Asia Report
