Defensive investing
First, don't lose: avoid the big mistakes and you're already ahead of most people.
In One Sentence
Think first about how not to get knocked out, then about how to win: making fewer big mistakes is itself a way of winning.
Why It Matters
In the stock market, most of us are like weekend tennis players: the winner is whoever makes fewer mistakes, not whoever hits the prettiest smash. Howard Marks says you should invest scared, and I use those words to remind myself. If you buy only broad-market ETFs, playing defense means not borrowing, spreading across the whole world, keeping an ample emergency fund and sticking with dollar-cost averaging. You'll make a little less in bull markets, but when a bear market comes, you'll be the least likely to get badly hurt.
One Number
Complete trading records from Taiwan for 1995–1999 show that individual investors lost an average of 3.8% of the money they invested each year through trading, and about two-thirds of that went to costs such as commissions and transaction taxes (Barber et al. 2009 · Chapter III).
In the Book
Chapter VI uses a tennis analogy to show that investing is a loser's game, and lists my eight rules (the first six come from Kim Seung-ho; the last two are my own). Section 7 of Chapter V, "Don't Lose Money," turns it into concrete steps.
Go Further
- Charles Ellis The "loser's game" analogy comes from his 1975 article.
- Howard Marks He calls it defensive investing, built around leaving a margin for error.
- Borrowing and leverage No borrowing and no leverage is the first rule of defense.
- Avoiding scams Avoiding scams is defense too: first, don't let anyone con you out of your principal.
- Bonds and cash Keep your emergency fund in the right place, so you won't have to dump stocks at fire-sale prices in a crash.