Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.





One of Warren Buffett’s famous quote is:
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. :-)
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Disclaimer

Disclaimer:
The opinion post on this blog is personal and is not an inducement to buy or sell any investment products. The author of this blog will NOT be held responsible for any losses incurred due to the reliance on any content of this blog for investment decisions.