Protect Your Capital
If you want to grow your wealth steadily in long term, you must remember this rule, protect your capital. Protect your capital means never loss the initial money they you have invested. If you invest RM5000 in turbulence stock market just as end of 2007, you must learn to protect your capital by cutting loss to prevent further losing which eat up your initial capital.
credit through askmen.com
World famous investor Warren Buffet first rules of investing, protect your capital and the second rules, never forget the first rule. Therefore, Warren Buffet slowly build up his wealth protect his initial capital and expand the capital size gradually.
Just imagine you are playing card game on a table. You need chips in order to play the game with other players. The chips is your capital. If you loss all your chips, then you need to leave the table and go back to find some more chips. In real life, if you loss your capital, you loss your hard earn money. You need to restart by working and saving to accumulate your capital again. Does it worth to loss your capital or is it important to protect your capital?
Rule of thumb for investing is protect your capital and never forget about it.
The best way to do this (for general public/investors) is to take out your capital as fast as you can, leaving the remaining profit rolling. For example, if you had initially invested RM100,000 and at a point in time that investment grow to RM150,000, quickly take out your RM100,000 capital, leaving the remaining RM50,000 to generate more profit. You must overcome your greed. As for the sophisticated stock market investors, you can buy ‘insurance’ to protect your stock market investment against any losses (you know what ‘insurance’ that I meant if you are sophisticated enough).
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Mrcoolku Reply:
March 9th, 2010 at 8:34 am
I am not sophisticated investor but I guest the ‘insurance’ might be the call or put option to hedge against your investment.
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I agree to Ian to a certain extend. What i think is that people at a younger age should be more pick up a more aggressive style of investment style.
They should not withdraw their capital in the early stages but do it on a gradual manner because young people have time.
If you are in your middle age or going to retire age category, it’s better to fully protect your capital as time is not on your side.
Just my 2 cents!
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Mrcoolku Reply:
March 9th, 2010 at 8:40 am
Ya, sometimes youngster should be more aggressive but need to be prudent on the same time too. Actually, I invest most of my money in the stock market but I pick stocks carefully base on the fundamental. Investing wisely on the other hand also means protecting your capital.
However, if you really wan to protect your capital, you need to do as Ian said, take out the capital after you gain enough profit.
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Stock market is full of uncertainty, no one can predict what will happen next minute. I believe what Warren Buffet said is “not to lose money”. Therefore, the issue here is how you counter the risk of losing money.
I believe if you are very sure that stocks you are buying are genuine with good management quality, while their fundamental remained, isn’t a good chance to accmulate more to average down your cost during market downturn. My observation show that these counters are normally recovering in very short time after bad market sentiment. The bottom line, buying quality counters when they are cheap is actually a way of protecting your capital during bad time.
Same here, this is just my 2 cents opinion.
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Mrcoolku Reply:
March 9th, 2010 at 8:49 am
Well, you have your point. This could be apply during the recession period. In normal time, it would be risky to keep on buying low to average down your buying price. Something happen must have their reason behind it.
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Lai Seng Choy Reply:
March 10th, 2010 at 7:46 am
Yes. If the contraction is caused by market sentiment, most likely the fundamental of the company remained unchange. Therefore, it is chance to accumulate. However, we should always avoid those company’s that are getting unfavorable caused by poor management.
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