Monday, September 21, 2009

Buffett Quote: Never Lose Money


If you google "Never Lose Money", you will probably find it as one of Buffett law. If asked you can choose between
a) investment that lose 20% for first year and gain 20% the next year,
b) investment that gain 20% for first year and lose 20% the next year.
Which one will you choose?


Without any calculation, I thought b) will result in better result but actually both are equally bad.

a) 0.8 * 1.2 = 0.96 => 96% of original investment
b) 1.2 * 0.8 = 0.96 => 96% of original investment

You will lose 4% regardless of the choice. Therefore for every loss you make, you need a much better returns just to get back your investment.

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3 comments:

min dfin said...

Never lose money as in buffet famous law.
This is very true, as hard-earned money are really hard to come by, and seeing my own investment losing its value, to 20%, 30%, 50% or 100% is really painful.

Thien Rong said...

The point isn't about not losing money at all since everything you invest will have a risk of losing money.

The key is to take calculated risks. That is how casino make money. They will lose some money but overall they will make more money than lose money.

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