Watch the downside

Watch the downside Nov 29, 2013 12:02:36 GMT 7 oldman, me200, and 1 more like this

Quote

Post by candy188 on Nov 29, 2013 12:02:36 GMT 7

Oct 19, 2013 8:42:51 GMT 7 oldman said:

In the investing world, one of the key attributes of a fundamental investor is that he is always very careful about his downside.

~~ If I buy shares or warrants, I know that the maximum I can lose is the amount of money I put into the stock/ warrant.

~~~ On the other hand, if i Short a stock, I can lose my pants as one can never tell how high the stock may surge after that. The higher the stock goes, the more will be my loss if I short the stock. As there is no limit to how high the stock can go, this is like writing a blank cheque. Perhaps this is why I do not encourage futures trading as well.

As a fundamental investor, it is very important for me to protect my downside. At the very least, I must know the maximium amount I can lose in any investment. If the amount cannot be ascertained, then you will see me walk away from such instruments, no matter how attractive these may seem to be.

Good thing about being a fundamental investor is that the UPSIDE is UNLIMITED and if you protect your downside at the same time, you have the opportunity to multiply your wealth. Your upside is unlimited as once you buy into a stock and hold it when the stock continues to perform, there is no limit to your upside.

Hence, in the investing world, we always say that one should WATCH one's DOWNside and the UPside will take care of itself.

Similar sentiment shared by Mark Sellers.

Mark Sellers Speech To Investors – Focus On The Downside, And Let The Upside Take Care Of Itself

“As most of you know, we own two types of stocks in the Sellers Capital Fund. Category one we call “asset plays.” These are companies with tangible assets worth as much as or more than the current enterprise value, including any debt that’s on the balance sheet.

When we can find a company like this, we feel relatively safe buying it because we know there’s a lot of downside protection. Over the past few years, our philosophy has evolved to the point where we can kind of sum it up in one sentence: Focus on the downside, and the upside will take care of itself.

What this means is that we spend nearly all our time calculating the worst-case scenario valuation for a stock before we buy it. We do this because we hate, absolutely hate, to lose money. That doesn’t mean that when we buy a stock it can’t go down further. We’ve had enough bad months and bad quarters to throw that idea out the window!

No, what this means is that we do everything we possibly can to avoid buying a stock above its fair value. Our goal is to eliminate the potential for permanent capital impairment. Permanent capital impairment is when you buy a stock and it goes down and never comes back up, or at least doesn’t come back up for several years.

To us, permanent capital impairment, not volatility, is the big risk in investing. Volatility isn’t risk unless you have a short time horizon and might have to sell at the bottom. As long as you can ride out the waves, and are correct in your downside valuation assessment, then you have nothing to worry about. So if we can eliminate the potential for permanent capital impairment, we can essentially eliminate risk.

www.gurufocus.com/news/106292/mark-sellers-speech-to-investors--focus-on-the-downside-and-let-the-upside-take-care-of-itself

Post by oldman on Oct 19, 2013 8:42:51 GMT 7

Post by candy188 on Nov 29, 2013 12:02:36 GMT 7