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The First Rule of Investing

Created on 18 Feb 2019

Wraps up in 2 Min

Read by 1.4k people

Updated on 03 Sep 2020

On the face of it, the two rules look pretty obvious. So, let’s delve a bit deeper and examine and crux of them.

People invest in the stock market with the intention of  unearthing multibaggers but the problem with this approach is that we usually take more risks than required in our extreme greed to get rich quickly. This is an erroneous approach to investing in the market. The investor’s primary goal should be to avoid bad companies, if an investor is able to do that, he is bound to receive handsome returns in future .This is because  it is the inherent nature of the stock market to rise perpetually in the long run. So, if you have a Portfolio in which you have protected the downside you can be rest assured  that great times are ahead.

Focus on buying stocks in which the downside risk is limited

This attention to buying stocks with downside protection is also important because of the Peculiar mathematics involved. Suppose you buy a stock that was trading at rupees 100 and it falls to rupees 50 (loses 50% of its value). In order to recover your losses, the stock needs to rise not 50% but 100% just to get you back your invested capital.  The “Rabbit vs tortoise” story is tailor made for investing. If you keep compounding at a decent rate year after year, you'll end up creating huge wealth so what is important is that you are at it all the time just like the tortoise.

Let's understand it this way, if you compound  Rs 100  at 15% for 2 years, you will end up with   Rs 132.25 , whereas if you compound at a glamorous 50% in the 1st year and -15% the next year, you'll end up with 127. 5 rupees. Consistency is invaluable !

Lesson - Be like Rahul Dravid

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Mukherjee is an avid reader and loves to write as much as read. She is the youngest of all but handles chores like a 50-year-old woman. She takes a lot on her plate and somehow, eerily manages to get the job done. As Hazel Grace stated, she could read a good author's grocery list, and so would Miss Mukherjee. 

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