Growing Your Money at Millionaire Returns
All self-made millionaires utilize the power of investing to get their money to make them even more money. They get their money to start working for them so they can eventually stop working for money. Unless you master this money skill of investing, you will never achieve financial freedom and abundance.
However when it comes to investing, most people share the painful experience of getting burnt in the stock market or in mutual funds (unit trusts). ‘ If I had kept all my money in the bank, I wouldn’t have lost half it.’ ‘After so many years of buying and selling, I find that after all the effort I have merely broken even’. ‘I should have kept the money in the bank instead.’ ‘ Every time I buy a stock, it seems to go down.’ Do you share this experience with most investors?
If so, you are one of many people who have developed a phobia of investing and have formed the belief that ‘investing is risky’. As a result, you are resigned to keeping your money ‘safe’ in fixed deposits earning a measly 2%-3%.
This belief is compounded by the fact that we are taught by finance courses, banks and financial advisors that ‘High risk leads to high return’. In order to earn high returns, you must be a risk taker!
This is totally rubbish! All of us have been brainwashed by this inaccurate generalization. In fact, the greatest investors in the world are NOT risk takers. They are in fact, very risk averse. Warren Buffett, the world’s greatest investor, who achieved 24.7% returns per year for the last 49 years is extremely risk averse. His fundamental principle in investing is ‘capital preservation.’ He would rather not make any money if there is a chance of losing it. His first rule in investing is ‘Never Lose Money.’ His second rule is ‘don’t forget rule number one.’ As a result, Warren will only invest in a stock if it has very low downside and a very high probability of success of at least 90%.
Warren Buffett’s Two Rules of Investing
Investing Rule Number 1
‘ Never lose money.’
Investing Rule Number 2
‘ Never forget rule number one
I follow the exact same philosophy. Again, many people perceive that because of the businesses I have started and the investments I make, I am a risk taker. In actual fact, my top value is ‘security.’ I am extremely risk averse and will only invest in a business or stock if they is a 95% chance of winning and even if I lose, the loss is negligible.
To be a winning investor, you must adopt this same principle! You must be risk averse! You must always follow the principle of ‘capital preservation.’
Now, you may ask me, ‘ If high risk does not lead to high returns, then what does?’ The answer is ‘financial intelligence.’ High financial intelligence leads to high returns!
When you have high financial intelligence, there is little risk, because you know exactly what you doing. When you don’t have strong financial intelligence to fully understand the business behind the stock, then investing becomes very risky.
Risk is contextual. How risky an activity is depends on the level of competence of the person doing that activity. For example, if I told you to climb a mountain where there is a pot of gold at the top, would it be risky? Would you have to take a high risk to achieve the high return? Yes! It is risky for you because you have never been trained in mountain climbing and do not have the necessary safety equipment. There is a high chance you will fall and die!
However, for a professional & experienced climber who has scaled Mount Everest twice without oxygen, would it be risky? No! Why? Because his high level of competence eliminates the risk. To him, it would be low risk, high return.
Take another example, if I were to ask you to drive a formula one race car at 260 km per hour round the racetrack in order to win a grand prize, would it be risky? Again, to you it would because you are not trained. It would be suicide and I would recommend you not do it at all. However, to Michael Schumaker, it would be low risk and high return, because he has been trained to do it.
So is investing risky? Again it depends. If you are like the majority of people who have not been trained and have low financial intelligence, then it is highly risky! It’s like climbing that mountain with no training at all. Indeed, to them it is high risk, high return. I would suggest that they keep their money in the fixed deposit.
However to Warren Buffett, investing is ‘low risk, very high return’ because he has a high level of competence in investing. So again, you can see that high risk does not lead to high return, it is high level of competence that leads to high return.
