Rule # 1 of Investing Debunked

Investing is not just about making money. It’s about making more money than you lose. One of Warren Buffet’s famous quote is about rule #1 of investing which states never lose money. This is true under certain conditions and investing strategies, but every one knows that if you invest in 10 individual stocks, 5 may be winners and 5 of them may be losers and in that case you may want to cut your losers short and let the winners ride; but notice that if you cut the losers short then you will have losses. If you’re an option or day trader it’s the same and if you’re a buy and hold investor it’s similar as well. In the buy and hold investing world the loss is a paper loss and you don’t cut the losses. You just continue dollar cost averaging by continuing to buy more of the underlying stock or index fund.

This one quote by Warren Buffet has made most people terrified about investing in the stock market. This is because it feeds their fear of failure and causes them to give up before they even get started. The fact of the matter is that we will all lose money when it comes to investing. It’s about learning from the losses and knowing what to do when they occur. Yes you can read books and take courses, but only after experiencing a loss first hand will you know how it makes you feel and which strategy works best for you and your risk tolerance.

I, for example, missed so many buying opportunities in bitcoin because I was afraid of losing money. I had the insight and opportunity to buy near the bottom at around 3000 and near the onset of all the institutional buying at around 10,000, but I only bought what I was willing to lose; which was a couple hundred dollars at 3K and a couple thousand dollars at 10K. This was not a bad strategy and I still agree with this philosophy, but I needed to be willing to lose more money. That’s the point. That’s what investing is. Investing is not being afraid to lose money when taking calculated risks and sometimes that calculated risk is betting on the fact that a total stock market index fund or S&P 500 fund will always recover and go up over time.

William Bernstein once said the more comfortable you are buying something in general the worse the investment is going to be. Which in turn means the more uncomfortable you are buying an investment the better the investment may turn out and I was very uncomfortable buying Bitcoin at 3K and 10K. I was in fact terrified buying at 3K and felt just a little better buying at 10K. This actually goes well with the famous Warren Buffet quote which says to be greedy while others are fearful, but what I didn’t realize is that sometimes you have to be greedy while being fearful. You have to be greedy while feeling uncomfortable. Which in turn means you have to be willing and also in a position to lose more money AKA take more risks.

Robert Kiyosaki once said In order to be rich you have to be a good gambler (take concentrated, calculated risk) and also a good banker (saver). In a sense you have to take calculated risks and you have to be ok losing money from time to time. You can’t be a financial loser, which is someone who can’t afford to lose money because they are living paycheck to paycheck. Those living paycheck to paycheck are living on the red line and think investing is too risky, because they can’t afford to lose anything. Once you are in a position where you can afford to lose more money, then you will also be in a position where you can make more money. This is one secret that has allowed the rich to continue to get richer.

Once you accept the fact that you will lose money with investing and you can afford to do so, then that is the time to begin your investing journey. You may ask what does being in a position to lose more money look like? It’s actually simple. It’s by having at least a 3–6 month peace of mind fund. It’s buy making sure you’re living below your means or as Robert Kiyosaki likes to say expand your means. What this means is if you realize you’re living above your means then find a way to make more money so that you can cover your expenses with surplus cash left over. This surplus cash is called cash flow and cash flow is what dreams are made of.

Published by The Fire Investor

Financial Independence hobbyist offering practical wealth building advice for all income levels with a focus on achieving early financial independence.

Leave a Reply