That’s not a catchy slogan or tagline. It’s a mathematical fact. If you have $100 and you lose 10 percentof it, it will take an 11 percent rate of return to get back where you started. If you lose 20 percent, you’ll need to make 25 percent to become whole. What if you lose 50 percent? What rate of return would you need to make your money back? The answer is an astonishing 100 percent!
Once you’re down 50 percent and facing that big 100 percent hill, it will take around seven years, if you’re able to make an annualized rate of 10 percent per year, to get back where you started. If you’re making closer to seven percent each year, you’ll be waiting a full decade to break even. If you earn four percent on your money, it will take you 18 years to recover from a 50 percent fall.
This leads to another quote, this one by Mark Twain: “I am more concerned about the return of my money than the return on my money.”
Can you see Wall Street looking down its collective nose, reminding Mr. Twain that he was no investment expert, broker, or financial advisor? That’s true, but he was an expert on life, a subject on which Wall Street could use some lessons. Infusing a bit more life into your investment process and reorienting your focus to regard the preservation of your dollars invested at least as highly as their growth is a good first step.
The last decade—2000 through 2009—is not-so-lovingly known as “The Lost Decade” thanks to the market’s logging a negative return in that stretch. Prior to that, from 1982 until March of 2000, the market ran upward with little impedance. But what about the stretch from 1964 through 1982? Believe it or not, that span represented yet another 18 years in which the pure buy-and-holder would’ve made nothing—zip, zilch, nada. And we in the United States have it good! Japan is still enduring an atrocious slide of over 20 years leaving the Nikkei still 70 percent south of its peak.
The world’s best investors are not buy-and-holders. They’re risk managers. These are folks like Sir JohnTempleton, Jean-Marie Eveillard, Jim Rogers, and yes, Warren Buffett. They spend more time worrying about how not to lose money than they do trying to make it (although they do a fair bit of that as well). I’m not suggesting leaving all your money in T-bills and CDs. I’m asking you to shift your strategy to focus first on managing risk in your investments, then on your return.