How much would you pay to not lose money?

So one aspect we focus on is not losing money. We say it on the podcast all the time. And we are not just saying this as a punch line. The mathematics of investing and compounding demonstrate that avoiding large losses, you make more money over the long term. This is why the sequence of returns is so important. 

Look at the diagram below.

While the volatile portfolio has a higher arithmetic average than the steady portfolio, the steady portfolio has a better geometric return (that one that matters) because it avoided the large loss. It’s no trick, it’s just the mathematics of losses versus gains. 

But when every asset class is rising and in many cases rapidly, it can appear to be a losing strategy to focus on avoiding losses. After all, cousin Billy is making lots of money and he is an idiot! So if I’m smarter than Billy, I should be making more. But this mistakes making money at one point, the short term, while ignoring the long term. It’s the parable of the tortoise versus the hare. 

This inverts the whole idea that we investors pay money managers to make money not avoid losses. And there is a big difference. 

How can you measure avoiding a loss? How much would you have lost? 

The idea is to keep the odds in your favour. We make money and paradoxically beat the average by focusing on avoiding losses.

Think about this - imagine suggesting that you spend some funds shorting the market. While the market rises, the losses from the hedging will stack up until that moment when markets crash and your portfolio falls less than the average or even makes additional money because your portfolio only fell thanks to the hedging which allowed you to compound at a higher rate in the next cycle.  

So reducing volatility over time via consistent rebalancing is the key to success.  

We understand selling winners and buying losers kind of sucks. But it works. 

At TMM we want you to understand that is why we harp on so much about avoiding losses.