Another market high; but what happens when you lose? Your Weekly Update

It’s fair to say we’re all smiles just now, what with many portfolios gleaming in the glow of last week’s all time market highs. But what happens when the same market declines and accounts lose money?

Market highs are inevitably followed by declines and it is for that reason we take a moment in this week’s Update to illustrate why we tend to focus first on preserving wealth and second on growing it.

As you’ll see, for many of us, our investment success will be primarily determined by avoiding significant loss and second by achieving returns.

You might want to pass this one along!

All the best,
Lee and Jeremy


Quote of the Week

“Rule Number One: Never lose money. Rule Number Two: Never forget Rule Number One.—Warren Buffett (84 years old billionaire investor, $73 billion net worth)


JL Davis Thoughts This Week

Last week’s all-time U.S. stock market high has many investors, and especially the media, positively giddy. At JL Davis, we have to admit we are all smiles as well. But we never forget Mr. Buffett’s rule expressed above.

Why?

Because in our experience, losing money is the single biggest reason why client’s portfolios can fail. In order to understand why, let’s take a look at the math.
Pretend we have a portfolio of, say $100,000, and we lose 50%. By the way, the S&P 500 stock index lost more than that in 2008-9 in one year’s time. Our $100,000 just became $50,000. So, we need a 50% gain to get our money back, right? Wrong.

A 50% gain on $50,000 is $25,000. Meaning our (now) $50,000 portfolio is worth $75,000, some $25,000 less than we started with. Ouch. To get back to $100,000 in this example, the $50,000 we have left needs a 100% gain! That, friends, isn’t easy to do. Which is why it’s a good idea to have a strategy to limit losses in the first place when possible.

The media as well as the financial industry has done an exceptional job of keeping our eye off the ball by training us to focus on “average returns” or “buy and hold” or “focus on the long term only”. While each of these maxims is important to consider, much, much more important to consider is Mr. Buffett’s rule: Don’t lose money. Whether you happen to be one of our clients with $10 million, or $100,000.

The bottom line is that losses hurt your portfolio much more than equivalent gains help your portfolio simply because the losses come as a percentage of a larger total. Which is precisely why it’s so difficult to recover from the kinds of losses some investors experienced in the tech bubble of 2000-1, or the financial crisis of 2008-9.
So while we at JL Davis are constantly engaged in analysis to construct outstanding portfolios filled with excellent strategies, managers, and tactics designed to achieve fine returns over time, we prefer to go a step further. We prefer to have strategies in place to protect against steep declines.

Now and then, in the short term, those strategies can reduce gains a bit. But over time we have found that the power of preserving capital first seems to win out consistently.
For now, let’s enjoy the new market highs. And let’s keep an eye on keeping our money and remember Buffet’s Rule Number One.

Lee and Jeremy