#1 Rule to Investing
Over the weekend, the WSJ published a detailed article about all the investment opportunities that were brought to Warren Buffett during the debacle. The article begins with some sage advice:
“Warren Buffett believes his best deals during the economy’s biggest belly flop since the Crash of 1929 may well turn out to be the ones he didn’t do.” -Scott Patterson
Ever since I began investing, my father has repeatedly told me “The #1 rule in investing is don’t lose your client’s money. The second – don’t forget rule #1!”
The importance of playing defense seems to apply in many other areas. For instance, take a look at sports. In all of the history of the NFL, every Super Bowl winner has been the team that was known to have the better defense, with the exception of two teams (Colts over Bears in 2007, and Rams over Titans in 2000 – and that was ironically won by the offensive Rams team putting up a defensive goal line stand that stopped the Titans inches away from winning). Likewise, in baseball, offense wins games, but pitching wins championships. We even have this concept reinforced to us when we’re offered to remove tickets from our driving record through “defensive” driving courses.
When it comes to investing, this principle couldn’t be more true. If you lose 50% of your client’s money, going up 50% won’t get you back to where you started – you need to double their money!
We believe that our strong performance has been a result of our playing defense. We have a strong aversion to a permanent loss of capital and accordingly, we “look down” before we “look up.” By avoiding the losses, you then have more capital to invest when the market comes down, thus you can win both directions – on the downside, and the upside.
How do you best avoid these losses? It all comes down to price. Our website states, “We believe that by first making our foundation a focus on price paid, we are managing risk for our clients.” Or as my father has taught me, “A low purchase price covers a lot of sins.”
Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.