It is already known that sound investing requires protection of one's capital. Even if one does not make money from an investment, at least he does not wish to see his principal capital vanishes into thin air. This is the terrifying thing that can happen to an investor especially one who invests using his own hard-earned money. Many investors while knowing this very important sound investing principle, fail to execute this principle when making investing decisions. Typical investors as human beings maybe emotional when making investing decisions. The human psychology mostly want to hear and decide based on good advantages and simply ignore or do not take into serious consideration the possible bad downside when entering into an investment.
Because of this, some investors may enter into an investment without understanding the investment at all. They are simply told by the financial salesperson about the excellent returns from an investment and thus never consider carefully possible downside when investing in the particular financial product. It is always paramount to consider the worst possible consequences when the investment one is entering into fails. Will I incur the total loss of all my principal capital or will I get back part of my capital or ideally will I at least get back all my capital forsaking the returns?
For investors looking at long term investment, one always buy securities at undervalued prices, not just wanting to get highest rate of returns, but most importantly to protect the downside. This protection of downside is also called "engaging margin of safety concept" when investing. Always invest with a good margin of safety so that when the stock price moved down against the investor, he does not incur much loss or no loss if he had invested at shares prices much below what the shares of a company is worth. One general guideline though not 100% foolproof is to always seek to invest below the Net asset value (NAV) of a company. In this manner, even if a company goes bankkrupt and faces solvency, the investor may still have hope of recovering back his capital after the company liquidates all it's assets to pay off all it's liabilities and still have some left over funds to return it's shareholders. This of course is not 100% foolproof since total value of a company's assests may not be correctly valued in it's financial reports due to fluctuating market prices.
For traders looking at short-term trades, protection of downside comes in the form of stop-loss and trailing stop-loss measures to cut loss fast or to protect gains. If traders are disciplined and know when to cut loss since they are protecting the loss of capital, then profits may naturally come along since they are not forced out of the game by a one time big loss in capital and can still continue to trade with their capital.
<In conclusion, of all sound investing principles, the most important one is "Never to lose money". To do this, investors or traders always must consiously remember to protect their capital when entering into an investment or trade.>
<Always consider carefully first the worst possible consequences when entering into an investment or trade and once one is comfortable with the worst consequences, then will it be sound to consider the possible rate of return on investments.>
Post Reply
1-2 of 2
a timely reminder. thks
