Fundamentals of Financial Intelligence
How Not to Lose Money: The Single Most Important Investing Principle
If Hippocrates was a Money Man instead of a Medicine Man
“Rule #1: Don’t lose money. Rule #2: Remember rule #1.”
— Christopher Browne, Parter at the legendary Tweedy, Browne fund
There are only a handful of paramount investing principles, beyond which virtually everything else is commentary or a fine point. Applying principles is always an art — in fact the very difference between an art and a science or a craft — but true principles of any practice are non-negotiable. Even apparent exceptions to them in the end prove only to illustrate them further — why they can only be adumbrated as “principles” rather than hard and fast rules.
And fortunately, investing is not physics or philosophy; many modestly lit bulbs have had fabulous success in the financial markets. Some are truly brilliant, like the ones that tend to become household names, but most are not; even most who are fabulously successful. Some ways of making money are more academically intricate and fascinating than others. But none of the crucial and universal principles behind successful investing are hard to wrap your mind around, but they are easily overlooked or forgotten.
So what exactly is this principle I make such an audacious claim for? The asymmetry of upside and downside risk. Or in simpler terms, losing money is more bad than making money is good.
You have missed a million opportunities — you probably didn’t get a piece of automobiles, air travel, cell phones, the Internet, when they were new technologies. A lost opportunity is not really anything “lost”, except theoretically. But lost money is lost money. It is a gross if common error of analysis by comparison think you are actually “out” anything because you failed to ride a wave upward, even if everyone else seems to be doing so, or claims to have. You only need to get rich once. Or was Warren Buffett put in his classically pedestrian style, “There are no called strikes in investing.”
Or to put the point yet another way: Do not confuse fear of loss with fear of losing an opportunity.
When you are at the plate on a baseball diamond, you are responsible for each pitch even if you don’t wish to swing at it. You can get a strike called on you as long as it lands in the strike zone. But you can wait for as many pitches as you want as an investor. Fifty, a hundred, a thousand. Isn’t it better to let a few perfect pitches past you than to risk swinging at a bad one you don’t have to? There will always be another opportunity — every serious and disciplined investor knows this. But there won’t be another way to recoup money you’ve lost, not in the way you initially got it. To cite Buffett again, imagine if you had a punch card with only twenty slots to spend over your entire life, wouldn’t you want to wait for something really exceptional to come along before punching it? Play for the long haul. Let everyone else get excited about chasing unicorns. All that sitting around waiting on a pile of cash will look awfully smart the next time there’s a financial panic or bias beating down the market value of a meatball down the middle.
