Every successful story gives us insights on how to succeed. We see rich man on magazines speaking how successful and how wealthy they are and that they sounded like they have the secret short cut to making money in 2 weeks. But yet only the most generous persons would openly share the real steps and philosophy which help them become the men they are today. We would gain a lot of benefit by learning from them.
No matter golf players, public speakers or pianists, the best always master the basics. We are going to talk about the basic principles in investing properties, stocks, options, new enterprises or antiques. These core principles can make your investment strategies safe ones.
The true fundamental principles are extremely important for beginners as well as experienced investors alike. For old investors, no matter how much experience you have got in investing. If you do not master the fundamentals, there is still room for you to grow by studying them. And for beginners, it is great for you to start with a solid foundation. You should spend the time and effort these rules deserve and review yourself constantly to ensure that you’re moving in line with them.
Before you learn how to increase your wealth, you must know how to prevent it from decreasing. In Judo, before a student learns how to throw his opponents, he must learn how to protect himself in a fall. Same for investment, you must understand the real meaning of risk and how it relates to the potential return. You must also know how to protect your wealth and leave when the market is not moving as your wish.
Before you enter into any new investment transactions, you should have your safety fallback. You should never commit yourself into a new investment before you know where to escape. The point we think it is the largest amount of loss we are willing to take and we should stop the game and leave the table is called the stop loss point. This is to prevent losing more than you can handle in case of storm.
When you consider a new investment, the first decision you should make is the stop loss point. We have worked with many great investors. When we enter into a new transaction that worth attentions, without exceptions the first thing he or she always do is to seek a safe get away point. Whether they are at the 5 minute desk investing Nasdaq or at the weekly desk investing long term bonds, they would surely consider the potential risk before thinking about the expected return. If the return to risk ratio is not high enough, they would not bother.
An average investor we see every day in bank branches are not like that. They do the opposite. They are easily persuaded to believe in certain kind of make money opportunity. They missed the potential risk factor and have not even heard of the return to risk ratio.
Look at the advertisement about investment opportunities in your mail box. They always stress the attractive return but seldom mention what you can do to prevent loss in case of adverse situations. Hence, you must shift your paradigm from “the maximum profit” (return first) to “protect my money at any cost”. In other words, to keep on winning in the long term.
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