The Law of Investing

This is one of the most important of all the laws of money.

The Law of Investing – investigate before you invest. This is one of the most important of all the laws of money. You should spend at least as much time studying a particular investment as you do earning the money to put into that particular investment.

Check Every Detail
Never let yourself be rushed into parting with money. You have worked too hard to earn it and taken too long to accumulate it. Investigate every aspect of the investment well before you make any commitment. Ask for full and complete disclosure of every detail. Demand honest, accurate and adequate information on any investment of any kind. If you have any doubt or misgivings at all, you will probably be better off keeping your money in the bank or in a money market investment account than you would be speculating or taking the risk of losing it.

Money is Easy to Lose
The first corollary of the Law of Investing is: "The only thing easy about money is losing it." It is hard to make money in a competitive market but losing it is one of the easiest things you can ever do. A Japanese proverb says, "Making money is like digging with a nail, while losing money is like pouring water on the sand."

The Best Rule of All
The second corollary of this law comes from the self-made billionaire, Marvin Davis, who was asked about his rules for making money in an interview in Forbes Magazine.

He said that he has one simple rule and it is, "Don’t lose money." He said that if there is a possibility that you will lose your money, don’t part with it in the first place. This principal is so important that you should write it down and put it where you can see it. Read it and reread it over and over.

Time Equals Money
Think of your money as if it were a piece of your life. You have to exchange a certain number of hours, weeks and even years of your time in order to generate a certain amount of money for savings or investment. That time is irreplaceable. It is a part of your precious life that is gone forever. If all you do is hold on to the money, rather than losing it, that alone can assure that you achieve financial security. Don’t lose money.

Be Smart About Investing
The third corollary of the Law of Investing says: "If you think you can afford to lose a little, you’re going to end up losing a lot."

There is something about the attitude of a person who feels that he has enough money that he can afford to risk losing a little. You remember the old saying, "A fool and his money are soon parted." There’s another saying, "When a man with experience meets a man with money, the man with the money is going to end up with the experience and the man with the experience is going to end up with the money." Always ask yourself what would happen if you lost one hundred percent of your money in a prospective investment. Could you handle that? If you could not, don’t make the investment in the first place.

Action Exercises
Here are two things you can do to apply this law immediately:

First, think back over the various financial mistakes you have made in your life. What did they have in common? What can you learn from them? Accurate diagnosis is half the cure.

Second, invest only in things that you fully understand and believe in. Take investment advice only from people who are financially successful from taking their own advice. Play it safe. It’s better to hold onto your money rather than to take a chance of losing it, along with all the time it took you to earn it.

Posted by Brian Tracy on Nov 21, 2008

http://www.briantracy.com/blog/financial-success/the-law-of-investing/

Rule No. 1: Do Not Lose Money. How Warren Buffett avoids yearly losses in his entire portfolio?

Avoiding losses is probably the most important tool for long-term success in investing. No investor, even Buffett, can avoid periodic losses on individual stocks. Even, if you resigned yourself to buying only at incredibly cheap prices, occasional mistakes will still occur. What differentiates Buffett from nearly all other investors is his ability to avoid yearly losses in his entire portfolio.






How Warren Buffett avoids yearly losses in his entire portfolio?


Warren Buffett would rather not place his faith in the hands of investors and traders. The methods he uses to lock in yearly gains take the market out of the equation.

He reckons that if he can guarantee himself returns, even in poor markets, he will ultimately be way ahead of the game. 
To learn more, we should focus on how Buffett best avoids losses.

These include:

Timing the market. He is not concerned about the day-to-day fluctuations in the stock market. However, Buffett - whether by accident or calculation - must be recognized as one of the most astute market timers in history.

Convertibles. Some of Buffett's most lucrative investments in the late 1980s and early 1990s involved convertibles, which are hybrid securities that possess features of a stock and an income-producing security such as a bond or preferred stock.

Options. On a number of occsions, Buffett has expressed his disdain for derivative securities such as futures and options contracts. Because these securities are bets on shorter-term price movements within a market, they fall under the definition of "gambling" rather than of "investing." If Warren Buffett does dabble in options, and few doubt he could dabble successfully, he does so quietly. He once acknowledged writing put options on Coca-Cola's stock; at the time he was thinking of adding to his stake in the soft-drink company.

#Arbitrage. Not only did Buffett continue to beat the major market averages, but he suffered few single-year declines along the way. That second accomplishment is, by far, the more remarkable. Buffett's scorecard shows that he has increased the book value of Berkshire Hathaway's stock 35 consecutive years. In only 4 years, did the S&P 500 Index beat the growth of Berkshire's equity. Right from the start of his investment management career, Buffett resorted extensively to takeover arbitrage (the trading of securities involved in mergers) to keep his portfolio results positive. In poor market years, arbitrage activities have greatly enhanced Buffett's performance and keep returns positive. In strong markets, Buffett has exploited the profit opportunities of mergers to exceed the returns of the indexes.Benjamin Graham, Buffett's mentor, had made arbitrage one of the keystones of his teachings and money management activities at Graham-Newman between 1926 and 1956. Graham's clients were informed that some of their money would be deployed in shorter term situations to exploit irrational price discrepancies. These situations included reorganizations, liquidations, hedges involving convertible bonds and preferred stocks, and takeovers.


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There are only 3 ways an investor can attain a long-term, loss-free track record:

1. Buy short-term Treasury bills and bonds and hold them to maturity, thereby locking in 4 to 6 percent average annual gains.

2. Concentrate on private-market investments by buying properties that consistently generate higher profits and that can sell for greater prices each year.

3. Own publicly traded securities and minimise your exposure to price fluctuations by devoting some of the portfolio to unconventional "sure things (arbitrages).# "




Also read:

Focus on how Buffett best avoids losses

http://myinvestingnotes.blogspot.com/2009/09/list-your-top-5-rules-for-success-in.html

Smart Investing: Don’t Lose Money!

We’ve all been told that in order to create wealth we must take risks and invest, invest, invest. Between stocks, bonds, mutual funds, 401(k)’s, IRA’s and so forth, people are feeling the pressure to invest because they have been taught that it’s the only way to wealth. The problem is many people are losing money. And, though some recover from losses (and some never do), losing money has a much greater negative impact on your wealth than gains do. Let me explain.

Impact of Losses vs. Gains

First, some basic math. I want to show you how losses hurt much more than gains help. Many people are under the impression that if they have a 20 percent loss one year and a 20 percent gain the next, then everything is okay and they’re back to their original investment. Unfortunately, this isn’t true.

Let’s say you invest $100,000. The first year, you lose 20 percent. You’re left with $80,000. The next year you make a 20 percent gain. How much do you have? Remember the “gain” must be calculated from the current value of $80,000, so a 20 percent gain on $80,000 would take your value up to $96,000. You’ve still lost money.

But what if you had a gain first and then a loss, would that make any difference? Let’s see: Again, you start with $100,000. Only, this time, you gains 20 percent off the bat. Now you have $120,000. The next year you lose 20 percent, leaving you with $96,000. There is no difference whether you gain first or lose first; the loss can happen at any point and will still have a greater impact than the gain.

Don’t Lose Money!

Remember the most important rule in
creating wealth, “don’t lose money.” 

In the end, no matter how you choose to invest your money, make informed decisions and look at all your opportunities.

Dan Thompson is a 25+ year financial expert and author of “Discovering Hidden Treasures.” He specializes in wealth creation and retirement planning.

OCTOBER 5, 2010

http://www.quizzle.com/blog/2010/10/smart-investing-dont-lose-money/

The difference between Simple Average Returns and Compound Returns

Below is an illustration of the difference between simple average returns and compound returns, as well as the impact of losses no matter when they occur. Each Manager (A through F) had a different investment approach and therefore, performed differently in each of the three years. The table represents the different returns year-after-year over a three-year period for six separate managers.

	Client A	Client B	Client C	Client D	Client E	Client F
Year 1	10.0%	6.0%	16.0%	30.0%	45.0%	55.0%
Year 2	10.0%	10.0%	10.0%	-20.0%	-30.0%	-35.0%
Year 3	10.0%	14.0%	4.0%	20.0%	15.0%	10.0%
Simple Average	10.0%	10.0%	10.0%	10.0%	10.0%	10.0%
Compound Returns	10.00%	9.95%	9.89%	7.66%	5.29%	3.49%
Ending Value of $1 Million Invested	$1,331,000	$1,329,240	$1,327,040	$1,248,000	$1,167,250	$1,108,250

In each case, the simple return over the three years is 10%, whereas the compounded return (the amount of gain you have realized) fluctuates between a high of 10% and a dismal 3.49%. Despite the larger returns in some years, the investment is more severely impacted by the loss. Interestingly, as the size of the loss increases, a greater percentage gain is required to restore the account back to breakeven. In short, it is important to understand that managers can brag about simple averages but you can only spend compound returns. Our goal is to execute investment strategies that capture the most of bull markets while preserving gains in bear markets to provide superior long-term compound returns.

*While our rule of thumb for investing is "don't lose money", investments have the potential for negative returns over both the short and long term. Our goal, however, is to limit the downside through security selection, asset allocation, diversification, and the use of active risk management, including the use of options and contra-funds.

http://traderwm.com/DLM/

Compound returns are the most precise and accurate reflection of your portfolio's bottom line and thus, they are of utmost concern for you.

Compound returns are a reference to the cumulative impact of gains or losses on your portfolio, they are a reflection of your ability in your investing and they are indications of how much money is in your account. Simple returns, on the other hand, are the returns that occur each day, month or year and are only a snapshot look at an investment's performance without regard to its history. 


For example, if a portfolio is down 10% one year and up 10% the next, the simple return on this portfolio is 0% and the manager can report a "break-even" performance over these two years if he refers to his simple returns. However, when it comes to compound returns, which reflect the net effect to your account, the portfolio is actually down 1%. The loss in year one reduced the amount of capital invested for the following year and therefore, a higher performance was needed simply to return the investment to breakeven. It would take an 11% gain to make up for a 10% loss, regardless of the order of the gain/loss.

Malaysia’s rich spend mostly on cars, yachts and planes

By Clara Chooi

October 14, 2011

KUALA LUMPUR, Oct 14 — When they have some extra cash to blow, Malaysia’s rich prefer splurging on a fancy new set of wheels, luxurious yachts or private jets, the Asia-Pacific Wealth Report 2011 has revealed.

These big spenders see less glitter or glamour in jewellery or swanky watches, unlike their rich Southeast Asian counterparts in Singapore, who prefer burning bucks on these sparkling adornments.

Last year, 46 per cent of Malaysia’s rich invested their ringgit in luxury collectibles like cars, boats and jets, the highest percentage of any country within the Asia-Pacific region.

In 2010, 46 per cent of Malaysia’s rich invested their ringgit in luxury collectibles like cars, boats and jets, the highest percentage of any country within the Asia-Pacific region. — Reuters file pic

The region’s average topped at just 30 per cent, with Malaysia leading the list and followed by Taiwan at 38 per cent, Indonesia 36 per cent, China 35 per cent, Japan and Australia tied at 30 per cent, South Korea 28 per cent, Hong Kong 23 per cent, India 21 per cent and Singapore, merely six per cent.

Twenty-four per cent of Malaysia’s rich chose jewellery over gleaming sports rims while 16 per cent took a fancy to acquiring rare collectibles like special wines or old coins.

A small 10 per cent thronged art galleries to spruce up their collections while others invested in their favourite sports teams and other miscellaneous “investments of passion”.

The report, released yesterday by Merrill Lynch Global Wealth Management and Capgemini, surmised that such “investments of passion” would continue to hold appeal to all “high net worth individuals” or HNWIs within the Asia-Pacific market as the ranks of the wealthy in the region continue to grow at a brisk pace.

HNWIs are defined as those having investable assets of US$1 million (RM3.13 million) or more, excluding primary residence, collectibles, consumables, and consumer durables.

“Investments of passion hold appeal for all HNWIs, both for their aesthetic appeal and their potential to gain in value. Asia-Pacific HNWIs’ appetite for investments of passion increased in 2010, especially in emerging markets that suffered less than developed economies in the global downturn,” the report said.

The report also said last year’s spending pattern revealed that a majority of HNWIs in Asia-Pacific remained most heavily invested in real estate and equities.

An estimated 30 per cent of the financial assets of Malaysia’s rich is in real estate, followed by 28 per cent in equities, 26 per cent in fixed income, 10 per cent in cash or deposits and six per cent in other alternative investments.

A majority of the HNWIs’ holdings also stayed within their respective home regions, the report added.

“Malaysia, China, and India, the allocations to home-region investments remained high at around 85 per cent,” it said.

When compared to its neighbours in the region, however, the report said Malaysian HNWIs assets were the least diversified with 86 per cent in home-region investments.

The report surmised that the Asia-Pacific HNW segment had “thrived” last year but was expected to face a slump this year and in 2012.

“The number of HNWIs in the region grew to 3.3 million in 2010, from 3.0 million in 2009, making the HNWI population 18.3 per cent larger than in 2007.

“As a result of that growth, the Asia-Pacific HNWI population also became the second-largest in the world, overtaking Europe (which had 3.1 million HNWIs in 2010), and nearing that of North America (3.4 million),” the report said.

Economic expansion in the region was likely to “abate slightly”, however, this year and in 2012, as economies absorb the withdrawal of fiscal and monetary stimulus, rising inflation, constrained capacity, and the macroeconomic imbalances prompted by large foreign-capital inflows.

“As a result, GDP growth in Asia-Pacific excluding Japan is expected to slow to 6.9 per cent in 2011, and 6.8 per cent in 2012 (down from 8.3 per cent last year),” it said.

http://www.themalaysianinsider.com/malaysia/article/malaysias-rich-spend-their-money-mostly-on-cars-yachts-and-planes/

Don’t Lose Money!

The hardest thing in investing is recovering from a loss. It takes a 100% gain to recover from a 50% loss. So don’t lose money!

How to Never Lose Money in the Stock Market

Now that’s a pretty controversial heading, isn’t it?  It reminds you of Will Rogers’ line:  “I’m more interested in the return of my money than the return on my money.”

Losing money seems to be as big of a part of stock market investing as wealth building.  Losses and their devastating results certainly draw more attention.  In fact, the U.S. Securities and Exchange Commission, as well as other stock market watchdog agencies, require a warning to investors that losses are possible.

So how can I get away with that heading?  Simple:  Because it’s true!  A man named Benjamin Graham first wrote about the system in the ‘50s.  Warren Buffett and his Berkshire Hathaway company followed these rules and became the most successful stock market investor of all times.  These are their rules, and their system.  And here it’s presented in easy-to-follow terminology.

You must have a hook, and the acronym I use for this system is this: D.A.B.L.  (Don’t dabble in the markets, DABL instead). Each letter of the acronym stands for a part of investing; a rule if you will.  Follow these four rules and you will never lose money in the market.  Break even once, and you’re gambling.  There’s an old time Brooklyn comedian, named Myron Cohen, who said this about gambling:

“Here’s how you come out ahead in Las Vegas:  When you get off the plane, walk into the propeller!” So don’t walk into the propeller, follow the D.A.B.L. and build your wealth as sure as sunrise.

“D” Stands for Diversification.  To be properly diversified you need thousands of stocks encompassing all descriptions.  Large Caps, Mid-Caps, Small Caps, International, Growth, Value, Growth and Income, etc.  When you have a widely diversified portfolio, individual stock losses are swallowed by individual gains.  The “Enrons” will be offset by the “Microsofts” and “Exxons.”  In our practice, we use 54 mutual funds to achieve this.  Each fund owns hundreds and thousands of stocks.  Diversification upon diversification.  Now you might ask, “But what if I’d bought Microsoft and Exxon 20 years ago? Wouldn’t I have made much more?”  Yes you would have.  But what if you’d bought Enron?  Before it crashed and burned, Wall Street analysts wouldn’t shut up about what a great buy Enron was. You’d have lost everything, and it wouldn’t have recovered the same as the rest of the market when times got better.   In short, diversification removes the gambling aspect of stock market investing.

“A” Stands for Asset Allocation.  This goes hand in hand with diversification.  This is simply allocating investments in varied sectors of the economy to minimize market downturns and profit on the inevitable upswings.  Here’s a conservative asset allocation for all seasons:

Small Cap Growth funds               5%

Mid Cap Growth funds                 5%

Large Cap Growth funds               5%

Small Cap Value funds                 10%

Mid Cap Value funds                   10%

Large Cap Value funds                 10%

Value Blend funds                        10%

Aggressive Growth funds             10%

High Yield Bonds fund                   5%

Investment Grade Bonds                5%

International Global Bonds             5%

Global Emerging Markets               5%

International Growth                       5%

International Value                        10%

The word “cap” refers to Capitalization – the size of the stocks the fund purchases.  “Blend” means the fund invests across all styles and sizes in its area.  International usually means outside the U.S., while global includes U.S. investments.  This allocation uses strictly mutual funds.  Software like Morningstar places each fund in the “style boxes” described in this allocation.  If you don’t have enough assets to buy all those funds, start with “value” and “growth,” and leave “aggressive” and “emerging” markets for last.  If you’re investing in your 401(k) and don’t have all those options, do the best you can to duplicate this allocation with emphasis on “value.”

“B” Stands for Buy and Hold.  Buy and hold works, as proven repeatedly by the likes of Benjamin Graham and Warren Buffett.  Buying and selling securities results in losses or minimum gains for most investors.  It does generate lots of commissions, which is why the brokerage industry hates that one fact.  However they’re coming around with fee-wrapped account, tacitly encouraging buy-and-hold.

“L” Stands for Long Term Goals.  The minimum holding period is five to seven years.  Diversified buy-and-hold investments have achieved this goal in every seven-year period since 1969.  Stock market investments should always be held for the long term.  Anything else is gambling.

Now here’s a question that always comes up:  “I will be retiring next year.  Shouldn’t I be invested mostly in safe investments like treasury bonds and CDs?”

Well that depends on how much money you have for retirement.  The D.A.B.L. system is strictly to make money grow – make the pie bigger.  Most retirees have enough funds to leave a certain amount alone for seven years.  That’s the amount that should be invested for growth.  It’s going to vary for everyone.  There’s no pat answer – you’ve got to analyze your own situation.  Remember, this system is for growth, and every retirement portfolio needs growth – a certain amount of money targeted to get much larger in a given number of years to offset the ravages of inflation.

So go ahead, D.A.B.L – just don’t dabble.

By Patrick Astre

http://www.myarticlearchive.com/articles/8/224.htm

Message:  If you do not diversify, do not asset allocate, do not buy and hold, and do not keep your stocks for 5 to 7 years ... you are NOT investing but gambling.