Sunday, January 02, 2011

Volume 3 Issue 1: Intelligent Investing

Margin of Safety

By now, I do not have to tell you that there is most definitely more than one way to make money through investing. However, what most of us know, but almost never practice, is that there is no easy way to make money through investing.

Many of us are very tempted by promises of such and such people who profess the "sure-make-money" type of investments. Very often we hear people say things like, "Next year the stock market will go up. Just buy any stock and you will make money," Or you hear recommendations of such and such stocks which will "definitely" double by next week. In fact, we are always in search of such opportunities. I am not here to burst your bubble. Such opportunities do exist, but only when fortune shines upon us. Much like when we buy the lottery.

Not going to expound on the intricacies of probability theory today. In this issue, I would like to introduce the most fundamental misconception that people have about investing. Very often, we hear the phrase, "High risks, high return, and low risks low returns". To me, this is the biggest fallacy of investing. The reality is very often, high risk and negative returns. Some people buy the lottery their whole lives and never even make a dime off it. Some people invest in the stock market based on tips and rumours and lose a huge chunk of their fortune. And then they vow to stay away from the stock market forever.

Little do they fully comprehend the definition of high risk, which in the most common of definitions, mean that there is a very high chance of losing money. It is as simple as that. In Walking Down Main Street, we will explore investing opportunities that can possibly offer high returns, yet expose you to minimal risks. How do we achieve this? In Benjamin Graham's definitions, we call these things "margin of safety".

In the stocks that we are going to look at, not only do we hope to find strong consistent earnings, but we will also emphasize on finding very high margins of safety. This margin of safety manifests in many ways and in most cases, are very specific to the stocks themselves. But you can be sure to expect Walking Down Main Street to highlight these safety measures that can help you sleep soundly at night.

Finally, there is such a thing as low risks and high returns. Don't let your mutual fund consultants fool you otherwise. The next time before you purchase any unit trust or stocks, ask yourself, what is my margin of safety?

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