3 PRICELESS INVESTING LESSONS
I LEARNT FROM LOSING RM10,000
LESSON NO. 1:
Rule No.1: Never Lose Money Rule No.2: Never Forget Rule No.1
In one of my first investment ventures, I had lost almost RM10,000 of my initial capital of RM15,000 in less than a year because of a Ponzi scheme. In percentage terms, this would be about 67%. After some grieving period, my first thought was, “How am I going to recoup my investment losses?”. With only RM5,000 left in investment funds, I would need to triple my investment capital to RM15,000 to recoup the RM10,000 loss. To put this in perspective, if I were to put RM5,000 into fixed deposit at an interest rate of 3% per year, it would take about 37 years to get back to RM15,000! The repercussions of suffering a permanent loss in capital is immense. That is why I simply cannot emphasize enough these two fundamental rules of investing:
Rule No.1: Never Lose Money Rule No.2: Never Forget Rule No.1
To do this, we must manage our risks in investing by knowing what we are investing in and look for opportunities with significant margins of safety.
Nobody Cares About Your Money More Than You Do
LESSON NO. 2:
One of the reasons I had placed my money in the Ponzi scheme was that I had blindly trusted other equally ignorant “investors”. One factor which affected my family's decision-making was that an acquaintance had invested well over RM150,000 into the scheme. How could someone who had so much money, be so wrong? My flawed logic led me to believe that if so many “rich” people were doing it, it must be safe. When we see a friend/colleague invest in a particular venture, we tend to feel “safer” about that particular venture. One of the ways that we justify this feeling is the thought that, “At least, if I lose my money, we will all lose our money together”. Psychological research shows that most people would rather be in the majority and be wrong, than be the outlier and stand the chance of being right. On a completely logical level, this absolutely makes no sense. The diagram below is a clear depiction of what exactly happened to me.
Warren Buffett says this best: “You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right – that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.” That is why you should base your investment decisions on data and facts. No one is going to care more about your money than yourself.
High Returns DO NOT mean High Risk
LESSON NO. 3:
One of the most commonly spewed out “investment adages” is “high risk, high return”. This saying is meant to imply that in order to achieve high returns we must take high risks. My story would seemingly exemplify the above adage. Some people might say that I was trying to get 45% returns, therefore I must have taken high risks. That is why I should not be surprised that I lost my money. However, that “lesson” could not be further from reality. In fact, what I learnt was that risk comes from not knowing what you are doing. It has nothing to do with how high the potential returns were. Just think about driving a car. Consider an elderly lady who has not driven a vehicle her whole life. If she were to start driving on the busy roads of KL today, one would consider that behavior risky. That is because she has never learnt how to do it. But in the hands of an educated driver, driving a car does not seem all that risky. That is not to say that there are totally no risks, but having the skills and experience to drive a car significantly reduces the risks of driving in KL. To take this example a little further, consider an F1 driver. He would have no trouble driving a car at 300 km per hour. For most of us, even with years of driving experience, we would probably start shaking if we were to drive at 200 km per hour. The same goes for investing. When I invested in this Ponzi business, I had almost zero knowledge about what a good investment comprises. On top of that, I jumped with excitement at the phrase: “guaranteed returns”. This was a fact that the scammers exploited. The worst combination anyone with money can have is ignorance and greed. You can only be conned when you want something for nothing. And that was exactly what happened to me. I was ignorant and greedy. The fact that the investment promised high returns had nothing to do with risk. Just to test out that hypothesis, imagine if that same exact investment were to promise 3% returns per year instead. It would still be just as risky because the exact same pyramid or Ponzi structure still existed. They would still need to get new investor money to pay old investors, albeit to a lesser extent. With practice and knowledge, one can become like an F1 driver in investing. You can achieve high returns without taking unnecessarily high risks, just like a well-practiced F1 driver driving at 300 km per hour. In fact, it is BECAUSE of low risk that you will be able to achieve high returns! This is precisely where I now hunt for my investment opportunities.
To learn more about Low Risk, High Return investing, join our workshop in Singapore on 24 Jan 2015 Click HERE to enjoy your Christmas discount when you sign up for the Low Risk High Return Investing Workshop
Low Risk High Return Investing Workshop
The founder of Main Streeter Academy, Khor Shihong, is a former investment analyst at a global investment advisory. Before embarking on his career as an analyst and an entrepreneur, he was an economics and mathematics graduate of Bucknell University, one of the top 35 Liberal Arts Colleges in the US. At Bucknell University, he completed his Honor's Thesis in predicting economic recessions. The Main Streeter Academy was created to level the playing field for the laymen (or as he prefers to call them, Main Streeters) in the perilous world of investment. Combining his passion for sharing and penchant for analysis, Shihong designed a step-by-step investment framework to help Main Streeters master the art of stock picking in their efforts to pursue financial freedom.
Copyright of Main Streeter Academy © 2014