One of Warren Buffett’s famous quote is:
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.
Let’s look at to what extent not losing money is important in investment.
To illustrate,
if an investor loses 10%,
how much percentage does he have to earn, to go back to the pre-loss level ?
When he lost 10%, he left with 90% of his initial investment.
To go back to 100%, he will need to earn back the 10% he lost using what he has now, 90%.
Profit% he needs = 10%/90% = 11.11%
To generalise, if he lost x%, profit% he needs, to go back to pre-loss level is x%/ (100% - x%) .
Look at the table and graph.
we will be able to see:
as we lose more, it is more difficult to earn back to pre-loss level.
Just imagine, if we lost 50%, we need profit% of 100% to earn back to pre-loss level !
Therefore, to stress again :
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1. :-)
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1. :-)
