About Me 0099: Share trading has been around pertaining to higher than a one hundred year nevertheless possesses solely been open to the normal investor using the growth involving personal computers and the Web. Stock options daytrading doesn’t require you to be considered a fiscal wizard or even business wizard however there exists a studying blackberry curve to acquire via. Many people believe you will need a big accounts with lots of money so that you can day business around the stock trading game. Folks feel they need to hold out untill retirement life as soon as they’ll have sufficient occasion

Warren Buffett has a strict rule that he tries to stick to when he invests in the stock market or buys up company. It is to "never lose money" in the stock market. Why is this investment philosophy so important?

It's very natural to read the statement "Never Lose Your Money" in the title of the article and understand it well. It's pretty obvious to anyone in trying not to lose any money at all in the first place. duh. Intuitive right? It is a no-brainer but it's a lot harder in practice to really appreciate such a statement.

The statement applies not only to the stock market but in other types of investment as well. But we wil take equities as a platform for the discussion below as it is more easily illustrated.

The key emphasis for the above statement in "Never Lose Your Money" is this: Once you lose money, it is harder to make it back.

Why? Because your capital is eroded when you have lost a certain percentage of it. And a smaller capital makes it more difficult to reach a certain target amount. Let me illustrate.

Since August 2008 last year, the Shanghai Index of China and Straits Times Index of Singapore has corrected more 30% to June this year. At this point of writing, they have corrected more than 50%. Say you have invested $1,000 in ETFs that follows both indexes well, your value will be at $700. 30% loss right? And it seems very natural for any investor to console himself saying that "it's ok", "The market will recover". (and look where it is now: 50% loss)

It will recover eventually as all stock markets do in history. But it will take longer for it to reach your original level of investment of $1000. Why? Because a 30% drop does not translate to a 30% increase in order to recover back to the same level. A 30% increase will only make your remaining $700 increase back to $910. In fact, you need exactly 42.8571% to reach $1,000 again.

Imagine those people who were stuck in the tech boom in 2001 where some prices fell more than 80%. To recover to the same level, they have to shift their eroded capital to another stock or wait for the same stock to rise more than 400% in order to go back to the same level where they started out.

I have linked a picture of a table below to show the percentage increase needed to make up for a certain percentage loss.

This is a reason why a cut-loss strategy is crucial for any type of investment. Either that, you have to really really make sure you have invested at an all time low, which might be about now. We just have to get in our heads that by letting our investments drop more, we are incurring a larger loss than it actually looks like. So yes. Practice prudence in investing and make sure you do not lose money. At least, most of the time.

About Me 0099

Wednesday, August 8, 2012

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