In many things in life, I never cease to be amazed at the results that can be achieved by following some very simple rules. The same can be said with investing, where often there is a tendency to overcomplicate things. In this week’s column, I am going to get back to basics and show how two very simple rules can help investors stay away from their worst outcome – losing money.
Warren Buffett’s first rule of investing is “don’t lose money” and it is very good advice. Even the best investors lose money from time to time, but avoiding losses should be every investor’s top priority. This is because they are very hard to recover from and can wreak havoc with a portfolio’s long-term returns.
The gut-wrenching feeling of being a holder of a share that suffers a calamitous fall in price is a humbling and sobering experience. Yet, in very many cases the danger signs were there to see before the company and its share price came a cropper. Too often, the lure of a low share price and seemingly cheap share price suckers people in, often with disastrous results.