Warren Buffett has said many memorable quotes over the decades. And his track record demands that investors pay attention.
One of his most famous sayings is:
“The first rule of investment is don’t lose [money]. The second rule of investment is don’t forget the first rule.”
Buffett made this comment to emphasize that if one buys shares for way below what the business is actually worth, “you can’t lose”.
But everyone who has dabbled in ASX shares knows, in reality, it’s not as simple as that.
So to supplement Buffett’s advice, Marcus Today founder Marcus Padley recently wrote down his top 10 tips on how not to lose your money.
1. Beware of gurus
Be wary of market and stock commentators. Do your own research and make your own decisions — because no one really knows what the market or a particular stock will do.
The trap is that market commentators exist because they want to sell you something.
“It is a human need to be able to answer the unanswerable questions and we do it by deifying someone or something,” Padley said on the Marcus Today blog.
“In our search for answers to the stock market’s unanswerable questions, we credit our commentators with vastly more powers than they could possibly deserve or possess. And dangerously, he who guesses the most sells the most.”
2. Don’t pretend to be Warren Buffett
Padley urged investors to avoid salespeople who claim to emulate what Buffett has done or will advise you how to do so. Such attempts have cost investors more money over the years than they’ve made.
“No one has ever managed to replicate Warren Buffett’s performance. If they had, they would run a fund, we would all be invested and we would all be billionaires as well,” said Padley.
“But there is no fund. Because it’s just marketing.”
The idea of investing the ‘Buffett way’ is a massive drawcard for finance marketing — but it is all a lie, according to Padley.
“Buffett sells. The second best investor in the whole world, and the other 98 below that, we’ve never heard of. Because they don’t sell.”
3. Leave your greed at the door
Padley called greed in investors the “biggest killer of them all”.
“Approaching the stock market with greed is like running onto a battlefield in a bright orange vest. We’ll get you.”
4. Set realistic expectations
Setting realistic goals is important for healthy investing.
“Expectations. The root of all happiness. The root of all unhappiness,” said Padley.
“Expect the unexpected and expect the inevitable. Best you expect the expected.”
5. Avoid laziness
Padley said that there’s been “more money lost through laziness than mistakes”.
Active maintenance of one’s portfolio is mandatory for satisfactory performance.
“There is no easy route to riches in the stock market,” he said.
“There is no free lunch — participation without effort is not enough.”
6. Ignore so-called ‘inside information’
If someone whispers a hot tip to you, first have a think about their motivations.
Padley recalled a profound comment from a veteran investment professional:
If I had never been given any inside information, I would be a million pounds better off than I am today.
Anyone offering inside info is doing it out of their self-interest, not yours.
“The only reason people pass on information as inside information is because they want you to buy what they’ve just bought to get the share price up so they can sell.”
7. Initial public offers
Retail investors have often complained about the lack of access to hotly demanded initial public offers of companies about to list on the ASX.
Padley recommends thinking carefully about the motivations of a public float, especially for mediocre businesses.
“IPOs are not a road to gold. Most of them are insiders selling you their company at the highest price they can get,” he said.
“The golden rule of IPOs is that if it’s any good you won’t get offered it. If you get offered it, you don’t want it.”
8. Avoid leverage
Leverage refers to borrowing money to invest.
Padley points out that it is marketed as a way to magnify returns, but investors need to be aware of the other side of that coin.
“It works both ways. You lose much faster as well.”
This means that leverage works only some of the time, and being in the right place at the right time is difficult.
“It only works when you are right [with the stock pick] and with average equity returns after interest, transaction costs, inflation and tax of close to zero, you had better be right and right at the right time.”
Borrowing can’t be used regularly unless the investor has “a massive financial cushion”.
“Any broker will tell you, it’s for confident (or over-confident) traders and to make it work they have to trade at the right time — not all the time. That’s a big ask for someone with a day job.”
9. Don’t mistake confidence for future performance
Is the core function of the finance industry to make money for clients?
Well, according to Padley. It’s marketing. Selling success.
“When it comes to marketing, losers are kryptonite. But luckily investment is seen as an intellectual pursuit, so the winners make noise while the losers, conveniently, go away,” he said.
“And thank goodness for that. Imagine how much product would get sold if they didn’t.”
10. Remember your life outside investing
Padley reminded investors that there are more important things in life than your ASX shares.
“They say there are three foundations to spiritual and financial happiness and success: your relationship, your job and where you live,” he said.
“Get one of those wrong and they all go wrong. No mention of the stock market in there.”
The share market is not life, and it should only ever be “a side issue”.
“The biggest financial decisions you will make in your life have nothing to do with the stock market — like getting married, getting divorced, having kids, investing in your home and committing to your career or your business,” said Padley.
“These are the biggest financial decisions you’ll ever make. Look after them first. The stock market comes second.”