Why is it so important not to lose money (permanently)?

"...you can’t be wrong. You can’t have any zeroes. A list of big numbers multiplied by zero will equal zero. You can’t go back to “Go”."
-Attributed to Warren Buffett

Duuuuhh, you say. Its obviously important not to lose money! What a stupid blog post title! And what's `permanently' for? If one loses money that's obviously permanent, right?

Yes, I'm stating the obvious. But I do have a point to make. The thing about assets is that they tend to take a much longer time going up than they do coming down. This is especially true of the stock market. Every now and then, stocks exhibit this pattern:

Point A: A long-term (tortoise) investor notices that a stock is selling for a cheap price and buys it. She tells some friends about it and they tell her: "You GILA ka? The stock market is risky OKAY???" Duely chastised, she slinks away. But inwardly, she's confident: "I'm pretty sure this is a good investment".

Point B: Professional investors notice that the stock is edging up- the company's profits are also growing. They start buying it or recommending it to their clients. Meanwhile, the tortoise investor is pleased to notice that the stock is reaching its actual value.

Point C: Newspapers, magazines, internet articles start reporting about the stock; they start interviewing the company's bosses; the bosses become famous- men want to be them, women want to date them (if the bosses are men, that is). Your grandma and grandpa start buying the stock and harass you to buy it too. Meanwhile, the tortoise investor is getting edgy. She doesnt understand why the stock has become so expensive. She starts selling out.

After Point C: The company suddenly announces some bad news- perhaps its industry is going through some hard times, perhaps profits are falling. The professional investors pronounce that they are "surprised" by the bad news, and they downgrade the stock to a sell. Big equity funds start selling fast. Your grandma and grandpa dont agree- they still think the stock has a great future. Poor souls- they ride the stock all the way down. Meanwhile, the tortoise investor barely notices the mayhem. She's already bought into her next investment.

The point of this posting is that its much harder to make money than to lose money. Let's say you had the misfortune to buy the stock at point C. After the peak, let's say the stock fell 80% in value from price point C. To claw back the 80% you lost, you would have to subsequently invest in something that would give you a return of 400%, which is extremely difficult. Assuming that you subsequently put your money in investments that achieved 10% compound return a year, it would take you about 17 years just to get your money back.

This is the tragedy which befell many Malaysians during the stock market boom of 1997- many bought into terrible stocks that they knew nothing about, which subsequently crashed and have not recovered to this day.

To be a successful investor, I believe you have to be willing to purchase assets whose prices are falling (because the potential upside is much greater from a low price). In addition, you have to be mentally prepared for the possibility that once you purchase the asset, its price continues to fall, sometimes substantially so. This is because it is practically impossible (especially in the stock market) to know when an asset price has hit bottom.

But how do you stay calm if your investment continues to fall?

By being sure that the loss is temporary. An investment loss is temporary if the true value of the investment is above the price that you paid for the asset.

And what's the true value of an asset?

That's called asset valuation- it's a topic that needs a post all of its own.