Winning Investment Habit No 1 – KEEP WHAT YOU HAVE. Preserve your capital
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Rule No. 1: Never lose money.
Rule No. 2: Never forget Rule No. 1Warren Buffet
„Survive first and make money afterward.”
George Soros
„If you don’t bet, you can’t win. If you lose all your chips, you can’t bet”
What’s the difference between a Winning Investor and a Loosing Investor?
The winning investor – Believes that his first priority is always the preservation of capital, which is the most important cornerstone of his investment strategy.
The loosing investor – Has only one investment aim – „to make a lot of money”. As a result he often fails to keep the money he already has.
Did you know that if you have a stock that drops 20% then you would need it to grow 25% in order to get back to the same price level before the price drop. (Example: If you start with 100 dollars and lose 20% you will end up with 80 dollars. In order to go from 80$ to 100$ you need a gain of 25%).
If you lose 50% of 100 dollars you will end up with 50 dollars. But in order to get from that 50 dollars back to 100$ you need to double the 50 bucks. This means you need a growth of 100% .
It might not seem like a big deal – 50 dollars to lose is nothing catastrophic. But consider the same on a larger scale.
Let’s say that you have a pension fund that holds 1 million dollars. Because of problems in the subprime market your fund loses half of its value – now you only have 500 000 dollars left. What do you think how much time would it take to get back to the initial 1 million?
Well no one can tell for sure but the only thing that is known for sure is that it will take a lot more effort (and time) to get the money back.
Here is a chart that on the left give you the initial loss in % and on the right it shows how much you need to make afterwards in order to get the initial sum back.
| % of loss of initial investment | % that your investment must grow to get even |
| 1% | 1,02% |
| 5% | 5,3% |
| 10% | 11,1% |
| 15% | 17,8% |
| 20% | 25% |
| 25% | 33,4% |
| 30% | 42,9% |
| 40% | 66,7% |
| 50% | 100% |
| 75% | 300% |
| 80% | 400% |
| 90% | 900% |
| 95% | 1900% |
| 99% | 9900% |
This is exactly why Preservation of capital is ALWAYS the number 1 priority of any half decent investor. If you have a loss of 1 per cent you need a growth of more than 1 per cent to get the money back. The more you lose the bigger the gap between what you lost and how much you need to make to get it back will grow.
The ideas from this post are derived from the book „The Winning Investment Habits of Warren Buffet & George Soros”.
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