Rule #2 → Refer to Rule #1
Rule #1 → Do Not Lose Money
Invariably, in the world of investing something is going to happen unexpectedly that could end up costing you money. It’s painful.
For example, let’s say you invest into a company that is allegedly best-of-breed; it has a capable management team, ample market share in their industry, garners a favorable view by Main Street and Wall Street, yet still, while the broad stock market indices are rising, the stock you are holding is going nowhere, or worse, falling. Each day that goes by the divergence between the company you own and the market continues to widen. What should you do? Well…Rule #1, the most important rule to investing is “Do Not Lose Money!” Rule #2 is intended to be repetitive; rule #1 alone, is the lifeblood to creating financial well-being.
For those investing capital in either a small business, stocks, bonds, housing, real estate, commodities, currencies, collectibles, start-ups, cryptocurrencies, and such, it is essential to remember that wealth is created by earning, not losing money. Common sense is not so common. Time and again, investors and speculators are prone to lose their bearings by complacency or misinterpreting what they discern as undecipherable economic noise. Regrettably, they forgo the necessary rigor it takes on a continuum to employ rule(s) #1 and #2, and suffer the consequences at their own financial peril. I’ve seen novice investors wiped out from their mistakes. And, I have witnessed firsthand seasoned market players that have encompassed multimillion-dollar portfolios fall prey to structurally emotional errors driven by recency bias, greed, and foolishness that cost them dearly. Refer to rule #1.
Wall Street professionals act fast and furious in times of turbulence. They are lone wolves already with skin in the game that become even more predatorial by putting sizeable amounts of fresh capital on the line. It’s never easy. These intrepid buyers allocate capital throughout the turmoil, by rising above the fury and positioning themselves, at bargain prices, for the stock market’s next major advance. Retail investors, perhaps less informed and feeling anxious about the dire news (Covid-19), assess the carnage that’s underway and are apt to sell some or all of their holdings at a loss. What happened? They broke rule #1.
So, if while you are traveling along the path of financial fitness and end up stepping unawares in a big stinky pile of that four-letter word → L O S S, try to remember that in life, and investing there are always at least three options. Hoping is an unviable strategy.