Here’s a simple concept that can make your stock market investing more profitable. This concept will ensure that the likelihood of your investments making you money over the long term is higher than the average investor.
This concept is something that newbies ignore and pay the price for at some point in the future.
What’s the answer?
Did you get that?
For those of you who did not, it’s:
Newbie investor question #1: What’s the first thing I need to know about stock market investing?
Answer: Capital preservation
Newbie investor question # 2: Can you tell me what the holy grail of stock market investing is?
Answer: Capital preservation
Newbie investor question #3: How can I improve my investment performance?
Well you’d better get it, because if you don’t, you
could will bring financial chaos to you and your family.
You owe it to them to stop and think about the first rule of investing which by the way you should know off by heart by now.
What Is Capital Preservation?
Capital = money
Preservation = not losing
Instead of being greedy by thinking about how much money you can make from the stock market and how fast, start by thinking about ways to minimise your risk of permanent loss.
STOP BEING A LOSER BY THINKING LIKE A LOSER.THINK ABOUT CAPITAL PRESERVATION IN YOUR STOCK MARKET DEALINGS INSTEAD.
The stock market is not your private casino.
And if you are using leverage or are ‘investing’ on margin without knowing the true consequences of the market going against you, then you are the stock market’s bitch.
Two Investor Types And Their Application (or not) of Capital Preservation
Investor A comes across a stock. It’s a household name. It’s been in the news recently for making the most wonderful gadgets. He has $10,000 in total to invest.
A quick look at the price chart tells him that it’s been steadily rising for the past year.
It’s PE ratio is 28, high, but the outlook for the company is good.
He buys some shares using 20% of his capital – $2,000 and it is the only stock in his portfolio. He NEEDS to make this one a ‘winner’ because he lost a lot of money on the last 8 stocks from shorting them.
Investor B comes across the same company as Investor A and uses some of the following guides to help her with an initial assessment of the company:
- Stock Market Investing Like Ben Graham Using ADVFN
- Here’s A Quick Guide To One of Ben Graham’s Investing Strategies
- How To Use ADVFN To Invest Like Ben Graham And Walter Schloss
- How To Value A Company; The Lazy Investors Guide
Investor B does not even get to use all of the guides.
She remembers that any stock over a PE ratio of 20 is according to Ben Graham, a growth stock and therefore carries the risk of not being able sustain its earnings in the future which
would will lead to a tumbling share price if it cannot.
She does not know the future. But she does know that her portfolio of 22 stocks already carries enough diversification to minimise her risk of permanent loss.
Her thoughts quickly turn to the next company in her list to perform an initial assessment on.
How To Incorporate Capital Preservation Into Your Investment Strategy
Capital preservation is achieved by:
- concentrating on companies with low valuation ratios such as price to earnings, price to tangible book value, debt to equity and current ratios.
- thorough due diligence using Ben Graham’s criteria as guidance
- diversification. 20% of your capital in one stock like investor A is not proper diversification. Ben Graham suggested anywhere between 10 and 30 stocks using up to 75% of capital. The remainder to be held in bonds. If your are new to investing the ratio ought to be reversed: 75% bonds and the rest on stocks.
Permanent loss of capital will ensure that your potential returns are zero
You WILL lose money sometimes, all investors do. That is a fact.
Capital preservation will force you to substantially reduce your risk of permanent loss.
Thanks for reading. Make sure that you are paying for your next stock at a discount.