Don’t Lose Money: The Most Important Law of Lasting Wealth

By Dr. Steve Sjuggerud 

Friday, December 29, 2006 

Steve Sjuggerud’s note: Today’s DailyWealth is the fourth in our holiday series of issues written to help make you a better investor. For the most important law of lasting wealth, read on...

Let’s face it – most people don’t know when to sell a falling stock. So they’re frozen into inactivity, saying, “Should I just keep holding and hoping, or should I cut my losses now?”

This state of indecision is usually permanent, and often continues until you hear the all too familiar phrase, “well, it’s too late to sell now.”

One of my good friends lost it all following the “it’s too late to sell now” principle. He bought a ton of shares in a cable company based on his friend’s recommendation that it was supposed to take over the world. The shares soon tumbled in half, and his friend, who knows about the cable business, told him to buy more, so he did. The shares tumbled in half again, and he bought even more. He finally stopped buying when the shares hit a dollar a share. The shares eventually traded for pennies.

After you’ve read today’s essay, if you follow the advice in here, your constant state of indecision will be gone. You’ll never lose another night’s sleep worrying about which way your investments will go tomorrow. Because, unlike most investors, you’ll have a plan – knowing when to get out, and when to stay in for the biggest possible profits.

Buying stocks is easy. There are thousands of theories out there for why and when to buy. But buying is only the first half of the equation when it comes to making money.

Nobody ever talks about the hard part – knowing when to sell.

In order to invest successfully, you need to put as much thought into planning your exit strategy as you put into the research that motivates you to buy the investment in the first place. So please read closely here, and think about each point...

How Do You Evaluate Businesses?

In business and in stocks, you’ve got to have a plan and an exit strategy. When you have one, you know in advance exactly when you’re going to buy and sell. The strategy I’m going to show you will allow you to ride your winners all the way up, while minimizing the damage your losers can do. But before I get into the specific strategy, consider this business example...

Let’s say you’re in the tee-shirt business. You’ve made a ton of money on a tee-shirt business in the States, and you’re now in the Bahamas looking for new opportunities. You size up the market, and you figure you can make money in two markets: in golf shirts, geared at the businessman, and in muscle-tees, geared toward the vacationing beach-goers. These are two products clearly aimed at two different markets.

You invest $100,000 in each of these businesses. At the end of the first year, your golf shirts are already showing a profit of $20,000. But the muscle-tees haven’t caught on yet, and you’ve got a loss of $20,000. There are numerous reasons why this is possible, so you make some changes in your designs and marketing and continue for another year.

In the second year the same thing happens – you make another $20,000 on your golf shirts, and you lose another $20,000 on your muscle-tees. After two years, the golf shirt business is clearly succeeding, and the muscle shirt business is clearly failing.

Now let’s say you’re ready to invest another $100,000 in one of these businesses. Which one business do you put your money into? The answer should be obvious. You, as a business owner, put more money toward your successful businesses. But as you’ll see, this is the opposite of what 99% of individual investors in America do...

How Do You Evaluate Stocks?

Let me start by asking you a question – what does “owning shares of stock” actually mean? This isn’t a trick question – as you know, it means you’re a partial owner of the company, just like you’re the owner of the tee-shirt company in this example.

Owning your own business isn’t fundamentally any different than owning a share of a business through stock. However, most people treat them exactly the opposite...

Let’s say the shares of your two tee-shirt companies trade on the stock exchange.

They both start trading at $10 a share. At the end of the first year, the profitable golf-shirt company is trading for $12 a share, and the unprofitable muscle-shirt company is trading for $8 a share. At the end of the second year, the golf shirt company is trading at $14, while the muscle shirt company is trading at $6 a share.

Which shares would you rather own?

Even though you know you should buy the winning concept based on the business example, most investors don’t do so in their stock investments. They keep throwing good money after bad hoping for a turnaround. They buy the loser.

The Trailing Stop Strategy

In stocks (and in business, I believe), you must have and use an exit strategy – one that makes you methodically cut your losses and let your winners ride. If you follow this rule, you have the best chance of outperforming the markets. If you don’t, your retirement is in trouble.

The exit strategy I advocate is simple. I ride my stocks as high as I can, but if they head for a crash, I have my exit strategy in place to protect me from damage. Though I have many reasons I could sell a stock, if my reasons don’t appear before the crash, the Trailing Stop Strategy is my last ditch measure to save my hard-earned dollars. And it works.

The main element to the Trailing Stop Strategy is the 25% rule. This is where I will sell any and all positions at 25% off their highs. For example, if I buy a stock at $50, and it rises to $100, when do I sell it? If it closes below $75 – no matter what.

Don’t Let Your Losers Become Big Losers

So with my Trailing Stop Strategy, when would I have gotten out of the failing muscle-shirt business? You already know the answer.

Remember, the shares started at $10 and fell immediately. Instead of waiting around until they fell to $6 as the business faltered, using my 25% Trailing Stop, I would have sold out at $7.50. And think of it this way – if the shares fall to $8, you’re only asking for a 25% gain to get back to where they started. But if the shares fell to $5, you’re asking for a dog of a stock to rise 100%. This only happens once in a blue moon – not good odds!

Take a look at how hard it is to get back to break even after a big loss...

You’ll Never Recover
Percent fall in share price	Percent gain required to get you back to even
10%	11%
20%	25%
25%	33%
50%	100%
75%	300%
90%	900%

So what’s so magical about the 25% number? Nothing in particular – it’s the discipline that matters. Many professional traders actually use much tighter stops.

Ultimately, the point is that you never want to be in the position where a stock has fallen by 50% or more. This means that stock has to rise by 100% or more just to get you back to where it was when you bought it. By using this Trailing Stop Strategy, chances are you’ll never be in this position again.

Good investing, Steve

http://www.dailywealth.com/1041/Don-t-Lose-Money-The-Most-Important-Law-of-Lasting-Wealth

Don’t Lose Money!

W. Clement Stone once said, “If you cannot save money, then the seeds of greatness are not in you.”

Throughout the history of American enterprise, you’ve heard the words, "work hard and save your money." Work hard and save your money. It is the oldest rule for success in America. It’s so important, as a matter of fact, that W. Clement Stone once said, "If you cannot save money, then the seeds of greatness are not in you."

Saving is a Discipline
Why is it that saving money is so important? Because saving money is a discipline and any discipline affects all other disciplines in your life. If you do not have the discipline to refrain from spending all the money that you earn, then you are not qualified to become wealthy and if you do become wealthy, you’ll not be capable of holding on to it.

The Law of Attraction
A principle with regard to saving your money is the law of attraction. The law of attraction is activated by saved money. Even one dollar saved will start to attract more money. Here’s what I suggest that you do. If you’re really serious about your future, go down and open a savings account. Put as much money as you can into it, even if it’s only ten dollars. And then begin to collect little bits of money, and every week go down and put something into that account.

Attract More Money Into Your Life

You will find that the more you put in that account, the more you will attract from sources that you cannot now predict. But if you do not begin the savings process, if you don’t begin putting something away towards your financial independence, then nothing will happen to you. The law of attraction just simply won’t work.

Invest Your Money Conservatively
Once you begin to accumulate money, here’s another rule. Invest the money conservatively. Marvin Davis, self-made billionaire, was asked by Forbes Magazine, "How do you account for your financial success?" And he said, "Well, I have two rules for financial investing." He said, "Rule number one is, don’t lose money." He said, whenever I’m tempted, whenever I see an opportunity to invest where there’s a possibility I could lose it all, I just simply refrain from putting the money in. Rule number two is, whenever I get tempted, I refer back to rule number one. Don’t lose money.

Get Rich Slowly
George Classon says, in The Richest Man In Babylon, that the key is to accumulate your funds and then invest them very conservatively. One of the characteristics of self-made millionaires, one of the characteristics of old money in America is that it’s very cautiously, conservatively and prudently invested.

Don’t try to get rich quickly. Concentrate rather on getting rich slowly. If all you do is save ten percent of your earnings, put it away, and let it accumulate at compound interest, that alone will make you wealthy.

Action Exercises
Here are two things you can do to apply these lessons to your financial life:

First, open a separate savings and investing account today. From this day forward, put every single dollar you can spare into this account and resolve to never touch it or spend it for any reason.

Second, whenever you consider any investment of your savings, remember the rule, "Don’t lose money!" It is better to keep the money working at a low rate of interest than to take the chance of losing it. Be careful. A fool and his money are soon parted.

Posted by Brian Tracy on Jul 25, 2008

http://www.briantracy.com/blog/financial-success/dont-lose-money/

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