I HAVE "learned many things from him, but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong … (that) the way to build long-term returns is through preservation of capital". Stanley Druckenmiller on George Soros
Not losing money is a critical part of the investing process. The great investors say it in different ways, but the point is always the same. Warren Buffett says: "Rule No 1: never lose money; rule No2: don’t forget rule No 1."? Paul Tudor Jones puts it this way: "I think I am the single most conservative investor on earth in the sense that I absolutely hate losing money…. Where you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt."
Seth Klarman provides the fuller explanation in his book, Margin of Safety: "Avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather ‘don’t lose money’ means that over several years an investment portfolio should not be exposed to appreciable loss of capital.
"While no one wishes to incur losses, you couldn’t prove it from … the behaviour of most investors and speculators. The speculative urge within most of us is strong; the prospect of free lunch can be compelling, especially when others have already seemingly partaken. It can be hard to concentrate on losses when others are greedily reaching for gains and your broker is on the phone offering shares in the latest ‘hot’ initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome."