Rule No. 1: Never lose money.
Rule No. 2: Never forget Rule No. 1
Rule No. 2: Never forget Rule No. 1
- Warren Buffett
Value Investors are not just risk averse – they are loss-averse. Protecting the initial investment always takes priority over the objective of capital growth. I liken this to special operations in the military, where there are always at least 2 primary objectives:
(1) the mission at hand
(2) that all operatives involved in the mission return home safely.
The safety of the soldiers always takes priority over the mission's objectives (at least in the Israel Defense Force, which does not believe in 'suicide missions') and their lives will never be endangered unnecessarily. As such all efforts are made to minimize the risks involved and if it is decided that the risks are too high, then the mission is not approved.
And so it is with Value Investing. Value Investors adopt an attitude of 'better safe than sorry'. They are extremely reluctant to take unnecessary risks. You might as well call them the "Chickens of the Investment World". (However, when the market is driven by fear and panic, or behaves irrationally Value Investors display courage and daring that is extraordinary – more on this later).
This also makes a lot of sense. If you invest in a portfolio of stocks worth $100,000 and a market correction occurs decreasing the value of your investment by 50%, what percentage increase is required to return your portfolio to its initial value? Not 50% as you would intuitively think - but 100%. It now has to move twice as much just to return it to its initial value.
So how do value investors assess risks and minimize the probability of investment loss?
(1) Value Investors demand a Margin of Safety
(2) Value Investors are committed to rigorous investigative research
(3) Value Investors only invest in businesses that they fully understand
(4) Value Investors seek businesses that possess 'Economic Moats'
I will discuss and explain each of these points individually in the next couple of posts.
Shabbat Shalom and Have a Great Weekend,
Value Investors are not just risk averse – they are loss-averse. Protecting the initial investment always takes priority over the objective of capital growth. I liken this to special operations in the military, where there are always at least 2 primary objectives:
(1) the mission at hand
(2) that all operatives involved in the mission return home safely.
The safety of the soldiers always takes priority over the mission's objectives (at least in the Israel Defense Force, which does not believe in 'suicide missions') and their lives will never be endangered unnecessarily. As such all efforts are made to minimize the risks involved and if it is decided that the risks are too high, then the mission is not approved.
And so it is with Value Investing. Value Investors adopt an attitude of 'better safe than sorry'. They are extremely reluctant to take unnecessary risks. You might as well call them the "Chickens of the Investment World". (However, when the market is driven by fear and panic, or behaves irrationally Value Investors display courage and daring that is extraordinary – more on this later).
This also makes a lot of sense. If you invest in a portfolio of stocks worth $100,000 and a market correction occurs decreasing the value of your investment by 50%, what percentage increase is required to return your portfolio to its initial value? Not 50% as you would intuitively think - but 100%. It now has to move twice as much just to return it to its initial value.
So how do value investors assess risks and minimize the probability of investment loss?
(1) Value Investors demand a Margin of Safety
(2) Value Investors are committed to rigorous investigative research
(3) Value Investors only invest in businesses that they fully understand
(4) Value Investors seek businesses that possess 'Economic Moats'
I will discuss and explain each of these points individually in the next couple of posts.
Shabbat Shalom and Have a Great Weekend,
Avi
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