How To Never Lose Money In Investing
Warren Buffett famously said, "There are two rules in investing: Rule #1, never lose money. Rule #2, remember rule number 1."
This quote emphasizes the ultimate rule in investing: never lose money.
Many people approach investing with the wrong mindset of trying to win or make money.
Instead, investing is about not losing money or preserving capital.
The former approach is more appropriate for sales and marketing, not investing. In sales and marketing, your goal is to hit as many targets as possible.
In investing, your goal is to avoid taking any negative hits, like a fisherman waiting for the right fish.
Great investors always possess this one trait: humility.
Humility allows you to recognize which areas you need to improve in and forces you to take action, learn, and grow. This trait serves as a reminder to check your safety system before proceeding.
To become a successful investor, you must have a process for not losing money, much like a pilot who has a process for checking the safety system before taking off.
The investing process can be broken down into the following steps:
Read and understand the financial statements of an investment vehicle.
Read and understand the future cash flow of the investment vehicle.
Analyze the potential downside that could occur.
Recognize the knowledge gap that you still have and study them.
Evaluate the probability of losing money in the investment and prepare to act.
Great investors often have a long track record of not losing money rather than winning.
Investing is more about playing defense than offense and avoiding major mistakes.
Think about your grandma, who always told you not to take goodies from strangers. Investing is similar in that you must be smart enough to recognize which strangers are riches and which are crooks.
You improve yourself through education, learning, observation, and judgment.
Ultimately, having a solid investment process can lead to massive compound growth of money, making you a big winner in the end.