Rule One: Don’t Lose MoneyWarren Buffett once said “The first rule of an investment is don’t lose [money]. And the second rule of an investment is don’t forget the first rule. And that’s all the rules there are”. So for your investing pleasure, here are ten top tips for not losing your money. 40 years of experience in here.
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- Inside information. I have a colleague who has professionally traded all his life. It’s what he does. He tells us “If I had never been given any inside information, I would be a million pounds better off than I am today”. The only reason people pass on information as inside information is because they want you to buy what they’ve just bought to get the share price up so they can sell. Think about that.
- IPOs. The golden rule of IPOs is that if it’s any good you won’t get offered it. If you get offered it, you don’t want it. IPOs are not a road to gold, most of them are insiders selling you their company at the highest price they can get.
- Pretending to be Warren Buffett. The concept that you can emulate Warren Buffett has cost investors more money than it has ever made them. No one has ever managed to replicate Warren Buffett’s performance, if they had they would run a fund, we would all be invested and we would all be billionaires as well. But there is no fund. Because its just marketing. The concept that you can be Warren Buffett or invest the “Warren Buffett Way” is the biggest draw card the equity market marketing department has ever played and it is a lie. Buffett sells. The second best investor in the whole world, and the other 98 below that, we’ve never heard of. Because they don’t sell.
- Gurus. Go to any rain forest, discover any tribe and you will find them huddling under some concept of God and his creed. It is a human need to be able to answer the unanswerable questions and we do it by deifying someone or something. In our search for answers to the stock market’s unanswerable questions we credit our commentators with vastly more powers than they could possibly deserve or possess. And dangerously, he who guesses the most sells the most.
- Greed. The biggest killer of them all. Approaching the stock market with greed is like running onto a battlefield in a bright orange vest. We’ll get you.
- Leverage. The mechanism of greed. Leverage is marketed one way. But it works both ways. You lose much faster as well. That means it only works for some of the time and not all of the time. It only works when you are right and with average equity returns after interest, transaction costs, inflation and tax of close to zero, you had better be right and right at the right time. You cannot habitually use leverage to “invest” unless you have a massive financial cushion. Any broker will tell you, its for confident (or over-confident) traders and to make it work they have to trade at the right time not all the time. That’s a big ask for someone with a day job.
- Confidence. What’s the core function of the finance industry? I’ll tell you. It’s marketing. Selling success and when it comes to marketing, losers are kryptonite. But luckily investment is seen as an intellectual pursuit, so the winners make noise whilst the losers, conveniently, go away. And thank goodness for that. Imagine how much product would get sold if they didn’t.
- Expectations. The root of all happiness. The root of all unhappiness. Expect the unexpectable and expect the inevitable. Best you expect the expectable.
- Laziness. There has been more money lost through laziness than mistakes. There is no easy route to riches in the stock market, there is no free lunch, participation without effort is not enough.
- Life. They say there are three foundations to spiritual and financial happiness and success. Your relationship, your job and where you live. Get one of those wrong and they all go wrong. No mention of the stock market in there. The stock market is not life. It is a side issue. The biggest financial decisions you will make in your life have nothing to do with the stock market. Like getting married, getting divorced, having kids, investing in your home and committing to your career or your business. These are the biggest financial decisions you’ll ever make. Look after them first. The stock market comes second.