Monday, May 16, 2011

Rule One: Never Lose Money

"Rule One: Never Lose Money. Rule Two: Never Forget Rule One."
Warren Buffet

A more classic take on not losing money would be the old proverb, 'A fool and his money are soon parted'. If you don't treat your capital with care and consideration, then expect your capital to be lost or diminished over time.

Over the recent years, I've had many opportunities presented to me in the form of business ideas, ventures, partnership and pretty much anything where particular friends have been short of funds but think that they've got a good venture to offer to me.

The only time I've ever asked for capital was several years ago when interest rates for savings account were at 1% to 4%pa and I didn't want to risk 100% of my savings in the stockmarket until I'd saved a bit more. Inbetween low yield savings account and the high risk stockmarket, was the bond market. Corporate Bonds. They were offered by the major banks in Australia and probably by other investment banks but I didn't look at the investment bank offerings.

To invest in Corporate Bonds, the minimum capital requirement was $100,000 and I didn't have that capital so I had to try and raise some funds.

The yield was about 5%-7% and it was better than the interest returns we were earning individually on our savings account. Anyway, I could only rustle up an aggregate $80k so it wasn't sufficient. I was accepting all the risks and said that I would re-imburse any losses whatsoever and split all the gains with no accounting for the risks that I was accepting on everyone's behalf, simply because I wanted to experiment with other investment options. 

The risks of default on the Corporate Bond depended on who the Corporate Bond holder was and I was only going to invest in a Blue Chip company bond. Typically, the higher the risk of bond default, the higher the yield. However, my goal wasn't to maximise the yield. It was only to earn more than the low interest rate on savings account available at that time and yet not expose myself to the higher risks of the stock market.

Anyway, fast forward to now, I haven't asked for capital since and I don't need anyones capital anymore to enter into any investments that interests me. I have my own capital for doing whatever I want.

Because of that, over the years, I have had many business ventures proposed to me. Seeking venture capital or partnerships for cafes, restaurants, take aways etc. On average, the typical amount that I've been asked to lend ranged from $50k to $100k. That's a lot of money when the venture has multiple partners and multiple interested parties.

The problem with diluted ownership in ventures with multiple partners is that you lose control in terms of decision making. It becomes more the case of 'majority rules' and because of that, it means you risk subjecting your capital to greater risk of loss. For me, that's a huge detraction. I'm not interested in investing in any venture where I can't control the outcome directly but can only influence the outcome to some extent.

A friend of mine has recently asked me if I wanted to invest $50k with a partnership of four(total investment capital $200k) into a cafe with her uncle as the chef. So what was the problem with her proposal?
  • Firstly, her uncle would not be injecting any capital.
  • Secondly, the business' success will depend on mainly his performance.
  • Thirdly, I knew her and trusted her, but I did not know her uncle and I had no idea about how professional and dedicated he was to the food industry or how much I could trust him
If her uncle decided to throw in the towel and quit, what is going to stop him from walking away? He's not risking any of his money so what's going to stop him from quitting at an inopportune moment? Even if you reinforce his employment with a contract, if he wants out, he could burn all the food or give poor service, leaving you no choice but to terminate the contract. What if the business was built around him and he decided to leave?

There have been friends in the past who invested and lost, telling me that I was lucky not to have thrown my capital in with them. A the end of the day, it's not a question of luck. It's a question of judgement and analysing your risks and deciding what happens in various scenarios and what the possible outcomes could be. And if the potential scenarios aren't great, then having the gumption to say that you're not interested in investing.


  1. It is very important to know what you are doing when you are investing your money. Even though we cannot be certain how things will turn out, we must make sure we have an edge or advantage of winning.

    1. Thanks for your comment Thomas. Absolutely, you need to know what you are investing your money into. It's not good enough to take a gamble and invest without expecting a return of some sort right from the beginning.