How to Ensure You Don’t Lose Money Part 1

Losing Money

This and the following two posts continue and build on the subject of how we decrease risk while increasing return except that in this case you don’t necessarily increase return, you merely decrease risk, that is to say you minimize the chances of losing money.

We’ll start with what I believe is the most important factor in not losing money, at least not losing money in an absolute sense, though it’s only one piece of the puzzle in a relative sense.

Ask yourself “if I wanted to ensure I could sell what I bought for at least as much if not more than what I bought it for, what would be the most important factor I could consider?”

Buy something that will increase in value.

It sounds fairly obvious.  What’s the chance you’ll lose money buying a car?  Pretty high, why?  Because it tends to lose value with time, the same is true of cash, it tends to lose value with time.  What about buying an option, what’s the chance you’ll lose money?  Again, relatively high only because time is working against you, which means the longer you hold the more likely you are to lose money.  There are investments where time works with you and investments where time works against you, if you want to decrease the chances of losing money the solution is to buy things where time works with you by increasing the value.  

What are some examples of this?

  • Rare art – because it becomes increasingly rare with time it tends to increase in value with time
  • Real estate – again because there is a limited supply of it the value tends to increase with time
  • Consistent undervalued companies – notice we’re going back to this point about buying for below what something is worth, in many cases when you buy something for less than what it’s worth it will increase in value, at least for a time, the question is for how long?

What do you need to know about something in order to determine whether it will increase in value?  You need to:

Understand how time affects value in a given investment.

For example, patents might increase in value for a time but they also expire at which point their value expires as well.  The same is often true for royalty rights, books, movies, music, etc. tend to sell at a peak level for a time then decrease in value as sales drop off and then copyrights expire.  Bonds will never exceed their face value at maturity so time affects them by getting closer and closer to the face value (assuming they are going to actually pay out).  By contrast a market fund tends to increase in value with time because the market as a whole tends to grow due to increases in technology, etc.

This brings us to a huge advantage of private investing in certain areas.  What’s the number 1 way to ensure an investment increases in value?

Increase the value of the thing you’re investing in.

This is why people who want to get really exceptional returns generally need to control or at least have some influence over the thing they are investing in because it allows us to increase its value manually, by improving it, by marketing it, etc.  Obviously, this isn’t practical for a lot of people and not possible with a lot of investments, but if you want to get the best returns on a consistent basis it’s practically essential.

Buying something that will increase in value with time generally means it’s just a matter of time before you’ve recovered from any losses that might occur.  Of course you’ve also lost time in there, which might or might not be worth it depending on the alternatives but investing in something that will increase in value decreases the likelihood that you’ll need to worry about that lost time.

If you’ve got investing questions you’d like to discuss or like us to cover please click "Ask a Business Question" in the lower right corner of the screen to send it to us, looking forward to hearing from you.

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