It has been said that the three most important rules of investing are:

Don’t lose your money!
Don’t lose your money!
Don’t lose your money

The reason this is so important can be seen in the math of losing:

Consider the investor who starts out with $1.00 and loses half of it.  This is a 50% loss.  He now has only 50 cents left.  What percentage gain would it take for him to get even?

Many people say 50%, because that is how much he lost.  If he needed to earn 50 cents on a $1.00 investment that would be the correct answer.  But the problem is that our fictional investor no longer has $1.00, he only has 50 cents left.  And to earn 50 cents on a 50 cent investment requires a 100% gain.

So a 50% loss takes a 100% gain to recover from.  It is much easier to dig the hole than to get back out of it.

This is why risk avoidance is such a big part of our management efforts here at Hepburn Capital.  We understand what it takes to be a successful investor.

The Math of Losing, or, what a loss REALLY means to you