Defense as a Superior Investment Strategy

Too many people believe defense to be an unsuitable strategy for themselves. We are always told to be proactive and positive, to take the initiative and grab our chances; to the point where we get deluded into taking recklessness for pro-activeness. The truth is, the entire investment industry is built upon selling one thing: DREAMS. Dreams that lead you to spend huge sums on brokerage fees, investment ‘education’, trading software and investment systems. All for the sake of chasing that one dream investment that will take you to riches overnight. Sadly, it seldom happens.

The first rule of investment is: “Do not lose your money”. Making money is second. Once you lose your money, there is no more money left to be making money for you. Therefore for the vast majority of investors, defense is the way to go; to protect your money first, then slowly and gradually accumulate safe and reasonable returns.

Consider the following example:

You have $100. You lose 50%. Now you are left with $50.

With the $50, you invest again and this time make 50%. Do you go back to $100?

No. 50% of $50 is only $25.

So now, after losing 50% and then winning 50%, you are not back to even; but down $25.

Doesn’t this make it clear that defense is more important than offense? You need double the offensive effort to recover from a single defensive blunder.

Let’s see this from another perspective. We all know how the English Premier League works. You win a game and get 3 points. Draw a game and get 1 point. Lose and get 0.

Now, when the score is 0-0, you are on course to gain 1 point and need only one goal to gain 3 points.

But if you neglect defense and the opposing side scores one goal, the score becomes 0-1.

At this point, you are on course to gain 0 points, need one goal just to get 1 point, and need 2 goals to get 3 points. Didn’t you just make your life difficult for yourself by neglecting defense and letting in that one goal? An error by the team’s defenders just made the strikers’ work doubly hard.

In investing, as in football; always focus on defense first. Then only go for safe, secure returns. Make sure the opposing side is getting nowhere near your goal-mouth; then only slowly try to sneak in to score that goal of your own.

Going in with guns ablaze is not the way. Before you even fire a shot, you will be wiped out already.

Do not be swayed by the DREAMS people try to sell you. They are all designed to alter your psychology into willing to spend money to chase some far-fetched HOPE. Yes, they exploit people’s HOPE and sell DREAMS.

True investment is a simple process. You do not need to trade frequently and you do not have to be stuck on Bloomberg or CNBC 24 hours each day.

In sports, defense wins championships. In war, strong defense annihilates reckless attackers. In investment, defense makes you money.

Posted in: Investment