Novice Traders' Notebook  |  AUG 2002

Should Investing Increase Your Capital Or Protect It? by Omar Bassal

Should Investing Increase Your Capital Or Protect It? by Omar Bassal Preserving capital in today’s markets brings up questions you may not have considered. What is the most important goal of investing? This question is not as simple as it seems; more often than not, investors’ initial responses to it highlight why so many fail to generate market-beating returns. The most common answer you’re likely to receive to this question is: “Capital appreciation, of course! How difficult can that be to understand? You invest to earn a return on your money in excess of the risk-free rate, and if you’re investing stocks that are as risky as the general market, hopefully your returns are in excess of the average returns of the Standard & Poor’s 500.” Wrong answer. The most important goal of investing is capital preservation. While this is a subtle distinction, you can never get to the second objective of investing — appreciation — if proper precautions are not taken to preserve capital in the first place. Too many investors spend inordinate amounts of time seeking market-beating returns without imposing strict money management policies that would ensure the survival of their portfolio. As a result, they eventually lose their money. Capital preservation is more important today than ever before. When the US equity markets were in their heyday of the 1990s, few worried about preserving their money. As the market adage says, a bull market makes everyone look smart. Many of the “CNBC Generation” believed that the stock market was only going one way, and that was up. Risk control measures interfered with riding the next inevitable wave. The old paradigm was dead, a common argument went, and a new one was emerging. There was even a 1999 Fortune article that quoted an analyst from a reputable firm who remarked, “Any time in between 9:30 am and 4:00 pm is a good time to buy Microsoft.”

by Omar Bassal