Ann: MSB Partner JCR Files for Product Approval, page-78

“You contine to worry about permanent loss of your capitol, any investor or trader knows you can limit that with stop losses which cost nothing so maybe you lose 5%-10% of your initial outlay”

You see, that’s where I differ totally in opinion.

And the differences, I sense, lie in:

1. My not being a trader (I very seldom sell stocks, and I only make purchases a few times a year, on average), and

2. The very important distinction between temporary loss of capital and permanent loss.


Here’s my approach:

I buy only after I deem the probability of permanent loss of capital to be negligible.

If, for whatever reason (other than something fundamentally changing my view about the company) the share price subsequently falls by 5% I certainly don’t sell. I buy more.

For, if my research led me to conclude, with conviction, that the stock was a good buy at a price X, and that there was limited scope for permanent capital loss at that price level, then if that stock falls to 0.95x or 0.9x, then that to me is a better investment.

Provided – and it’s a big proviso – that I have not made any mistake in my assessment of negligible permanent downside.

I can cite many examples of situations where I have made my initial investment in a company, having concluded that any permanent downside risk was negligible, only to have the share price fall further, prompting me to make secondary (and sometimes multiple secondary purchases of the stock…often a levels 5% lower than my primary purchase and sometimes at levels 10%, or even 15% lower than my initial purchase.)

When the stock ultimately traded at its true intrinsic value, which was a lot higher than my initial purchase, I profited handsomely from not only my initial purchase, but even more so from my subsequent purchase(s) at even lower prices.

Based on your thesis of making use of stop-losses, I would effectively have been zigging at the precise time that I should have been zagging, the exact opposite, and I would have ended up not just locking in a small loss, but missing out on significant profits!

If you think with a “downside protection” mindset, the need for stop losses is negated.

By way of a crude example, if I a month ago bought a stock that I had assessed had significant upside and - equally importantly, negligible permanent downside - and the stock then fell in line with the broader market correction over the past few weeks (i.e., circa 8%), then based on your stop-loss invoking advice, I should have automatically sold it.

Yet I would have recognised that my stock price’s fall had nothing whatsoever to do with the company’s fundamentals, but due to an unrelated, extraneous factor called heightened market volatility.

And I would have happily bought more.

(I happen to think that the concept of “stop losses” is another one of many flawed constructs perpetuated by the finance and stockbroking industries acting exclusively in their own interests, as opposed to the interests of individual investors)

The best investing lesson I learned was from a very smart, sensible fund manager who always said,

“The easiest way to create wealth in the stock market is by not destroying wealth in the first place. So always begin your analysis of any stock with the potential permanent downside; only thereafter look at the upside."

"Always check Downside always first, Adam; and Upside last.”


It is what Buffet and many clever investors like him mean when they say:

Investing Rule #1: Don’t Lose Money
Investing Rules #2, #3, #4 etc.: See Rule #1