Losses hurt far more than profits provides value.
As mentioned in a previous article covering the topic in details, the asymmetric nature of losses and profits is very unforgiving.
The first reputable investor I heard speaking in depth about and really open about this concept was Ken Fisher back in 1997. He has repeated this mantra is several occasions. Here are his words in a nutshell:
“Consistency is the key. It is close to impossible to get a good, long-term, rate of return if you suffer serious negative numbers en route. It’s the math. A single year that is down 30% means you have to get 30% per year positive returns for the next four years to get back on track for 15% annual average. Or, if you score 20% annually for four years, and then suffer a 30% decline, your five year average return is only 7%”
As many other investors, he was stressing the impact that losses have on investors bottom line.
Now, what he said is common knowledge in the industry.
Sure, Warren Buffet - due to his Age and Longevity - has been one of the so called pioneers.
Even before Buffet, there were investors who understood these principles.
Others have shared their wisdom in their own style and particular way.
Here is what some very accomplished professionals have said about Capital Preservation and Avoiding Losses:
Jim Rogers, George Soros Partner at the Famous Quantum Fund, Today based in Asia and without any doubt e legendary investor:
“When I buy or sell something, I always try to make sure I’m not going to lose any money first. If there is good value, then I’m probably not going to lose much money even if I am wrong.The trick in investing is not to lose money. That’s the most important thing. If you compound your money at 9% a year, you’re better off than investors whose results jump up and down, who have some great years and horrible losses in others. The losses will kill you. They ruin the compounding rate and compounding is the magic of investing ”
Baupost's Seth Karman, The Margin of Safety man says"
“Avoiding loss is the most important prerequisite to investment success”
Paul Tudor Jones, Hedge Fund Manager/Legend and philanthropist
“Don’t focus on making money, focus on protecting what you have. The most important thing for me is that defense is ten times more important than offence. The wealth you have can be so ephemeral; you have to be very focused on the downside at all times."
George Soros, I don't think Soros needs an introduction does he? The famous Billion Dollar Pound Trade and His Forays into the Thai Crisis should ring a bell...
Well, just in case, here it is a brief synopsis: Soros is a Hungarian-American investor, business magnate, philanthropist, and author. He is considered by some to be one of the most successful investors in the world.
"Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. I am more concerned with preserving the Fund's capital than its recent profits, so that I tend to become more liberal with self-imposed limits when my investment concepts seem to be working"
Ed Wachenheim, Hedge fund Legend:
"I emphasize that our first goal is to control the risks of permanent loss. When we analyse a security, we first look for the attributes that will protect us against incurring a loss that cannot be recovered within a reasonable period of time. We will not commence analysing the positive attributes of a security until we are convinced that the risks of permanent loss in the security are relatively low"
And the list goes on....
We could spend days, if not weeks, quoting them.
However, that is not the objective in this post.
I am just emphasizing the importance of this principle and providing you solid arguments to support it, so you can start your investment efforts with the correct mindset.
There is an article in the archives that deals with the asymmetric nature of losses and gains.
The article explains in detail how the impact of high percentage losses have on capital appreciation and long term growth.