How To Invest Without Losing Money

The intention of investing is to grow the money. Everyone wants to make it grow at the fastest possible rate. If you want to be successful, you should seek advice from the one who already achieved success. In investing, who can you think of, other than Warren Buffett?

Warren Buffett, the most renowned investor, emphasis on not losing money.

He gave two rules.
Rule # 1: Don't lose money
Rule # 2: Don't forget rule #1

Surprisingly, Buffett has not advised about getting more return. He adviced on not losing money. It means controlling the risk is more important than reward.

In Mutual Funds, you may come across a product with high risk and high reward. It's not a great investment idea because the risk is also high. It would be better if you can pick a financial product with low risk and moderate reward. Controlling risk is the most important thing.
If you keep the risk under your control, the reward will eventually fall on your lap.

You get your active income by working hard. In passive income, you do not need to work, your money will work for you. Money begets money. Unless you have money, there is no passive income. Even if you do not make any profit, it's not bad. At least, you have the money with you. you can use it later at the right opportunity. If you lost your money, there is no way of getting the money back even when the opportunity arises.

Understanding the Loss of Money:

Let's understand the meaning of losing money. you should not count your profit or loss unless it is realized. Let's say, you buy a share at ₹ 100. After a month, it's trading at ₹ 80. You may feel like, you are losing money. Actually, you have not lost any money. Until you sell the stock, the loss is not actually a loss.
Warren Buffett also says " Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market". The stock you purchased at ₹ 100 is declined to ₹50. you will be panicked. you will fear the stock may fall further. So far there is no loss as you have not sold the stock. But under panic, you go and sell your stock at loss. This is the real loss. It would be very difficult to get breakeven.

Portfolio Loss:

Loss of money should be seen on the portfolio, not on the individual stocks. There is nothing wrong with losing money in bad stock. If the remaining stocks give profit more then the loss, it's not a bad thing. It's quite natural to lose money in some bad investment. No one can predict the future. Despite your perfect analysis, a company may not perform well. Or you might have made some mistakes in your analysis of a company. If you come to know that your company is not in good shape, you can exit the stock even with the loss.

Of course, only a few stocks in your portfolio is going to behave like this. Your portfolio can still make a profit despite some stocks giving a negative return.

How to avoid loss?
There are two golden rules to avoid losses in investing. They are very easy to follow. Though it's very easy to follow, many people are not aware of the rules.

Rule # 1: Invest for Long term

It's a surprising fact. You can avoid loss by simply staying in the market for the long term. Long term investment reduces the risk. Most of the people who lost money had stayed in the market for the short term. More than 90% of intraday traders loose money. Because they stay in the market only for a few hours. Long term reduces the uncertainty in the return.

Look at the Sensex yearly data. If you just stay 1 year in the market, you could even have lost over 50% of your investment. It happened in 2008. there are over 10 occasions in the last 38 years, you could have got negative returns.

Look at Sensex data for the return of 6 years holding. You could never have incurred any loss if you just stay invested for 6 years. Though at some 6 year period might not have yielded good returns like 1994-2000 and 2007-2013. Most of the other times, you could easily made over 15% return (CAGR).

Rule # 2 : Margin of Safety

This is the most powerful weapon of Warren Buffett. You have to buy a stock when it is undervalued. When it is selling at a price lower than its value. How can you find such stocks? The easiest way is to look at price to earnings (P/E) ratio. If P/E is less than 15, the stock is cheap. For small cap stocks, P/E should be less than 8. It's very rare to find such undervalued stocks in a bull market. You have to be patient untill you get the required P/E.

How the margin of safety will help you to avoid loss? Most of the large cap stocks trade between P/E of 12 and 30. If you buy a stock when P/E is more than 25, it may fall at any time. Conversely, when you buy at low P/E, the price can rise even if the company profit does not increase. I have to give a word of caution here. I recommend you to buy good companies cheap and not cheap companies. A bad company is always bad whether it is trading cheap or expensive. Look for good companies and wait till it gets cheaper, then buy it and hold it for long term.

Conclusion:
You can invest without losing money by
Investing rationally.
Acting without fear.
Following the basic rules of investing.
Being disciplined.

Have you incurred any loss in stock market? Will it be avoided if you had followed these two rules? Mention in the comment section.