April 23, 2020

Warren Buffett has a famous rule: “Don’t lose money”. This is a rule I have taken to heart because I am a risk-averse investor.

I like to avoid risks. I like to minimize risks. I don’t take unnecessary risks.

So in this video, I talk about 5 potential ways you can avoid losing money. Once you know how you CAN lose money, then you can avoid losing money. I hope you can avoid these simple and obvious mistakes as it will save you thousands of dollars.

Here’s what we will cover:

  • What are high risks stocks? How do you identify them?
  • How does low cash balance make you lose money?
  • How does high leverage make you lose money?
  • How does market demand make you lose money?
  • How does investing in a bad industry make you lose money?

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90% accurate transcript

Don’t lose money, just don’t, easier said than done, right? Don’t lose money.

So welcome back to my channel. And in this video I want to talk about how to invest $100,000 in stocks and focusing on not losing money. So if you have been learning investing for a while, you probably have heard of this quote from Warren Buffet. Don’t lose money and is probably his number one rule. And if you are his true fan, then do you know what his second rule is? Is two. Don’t forget rule number one, when you’re investing with a hundred K that’s quite a big balance. You’re somewhere between, you know, buying more real estate properties versus putting it into stocks. Now the first thing you need to consider when investing in stocks is not the upside. You know, it’s going to go big. It’s going to make you a millionaire. That is not the first thing you should consider. Instead, you should think about whether you will lose money or not.

And that’s probably what most people skip over. And that’s when people get caught off guard and they lose money. So in this video, we’re going to talk about five ways that you can lose money and you should avoid them when investing in stocks. Now of course, if you are choosing a mutual fund in the market, then your responsibility is really just choosing the fund and the fund manager will help you invest in whatever stocks he thinks is the best. So you don’t really have the responsibility for management. So this video is really applicable to people who are investing in the market. You want more control over your portfolio and you are not sure what to do and now you’re picking stocks. Now the first thing you want to avoid, or the first thing you can lose money is to invest in high risk stocks. Now what do I mean by higher stocks?

These stocks might not be making money. They are probably a new industry with heavy regulation. So when you’re investing in a stock that is not making money, and let’s say I’m a pension fund with you know, a hundred investments, the first one I’m going to dump is the one that is not making money. Because as an investor I want to invest in something that is making money, is growing and is bringing me income. So those high risk not making money, stocks will be first to be dumped. And that’s why the price goes down first. The second type of stock is really low cash balance. What do I mean by that? Now if you think about a stock like a person, you know, a person needs money to buy a food, a person needs to pay rent, a person needs to employ other people for services like you know, shipping from Amazon, so on and so forth.

So a person needs money to survive and of course they’re more money. A person has the more comfortable and safe he is. Same thing applies to companies. Now if the company you’re investing in has a very low cash balance, is on a lot of loans and you know, it’s barely getting by, then the risk of bankruptcy is quite high. So that is another stock you want to avoid is low cash balance. Third, high leverage. Now this can be a double edged sword. Now, if you look at some of the videos I have made before, I actually suggest you to use leverage ad. I’ll talk more about this in another video, but sometimes high leverage can lead to high interest expense. And that means imagine you have a credit card loan and you’re paying a lot of interest on the loan and if you coupled that with a low cash balance, then suddenly there’s a high risk that’s the company can’t pay off, it’s low and then later on declared bankruptcy.

So right now we’re in the middle of the Corona virus crash and you’re going to find a lot of companies who have a high debt balance struggle a lot and the equity, which is the stock price goes down by quite a bit as well. Now the forest one is really qualitative. When you’re investing in a company, you want to make sure you know the company very well and you want to understand whether the people in the market are using their products. Now for example, let’s say if you are investing in Starbucks, then you better be drinking their coffee. So then you know whether their coffee is good or not. If you are investing in Walmart, then you better be going to Walmart. So then you can see what people are going to Walmart or not. And that level of understanding just by being the customer of the companies you invest in will give you a slight advantage over even professional investors.

And here’s an example right now, a lot of funds in us and Canada are looking to invest in China. You know, a lot of Chinese stocks are going to go IPO in us. Now of course there is a lot of growth opportunities in China, but then there’s also a giant disconnection between us and China and how it’s, it’s hard to get an understanding of what’s going on in China when you’re in us or in Canada. So whether a company is performing good or bad, you’re really relying on news, which might not be a reliable source. So when you’re investing in a, you want to make sure you understand the company’s products very well. Ideally you should be a customer of that company. So then you know, at least whether they are dominating the industry or not. And finally, you don’t want to invest in a company that the industry is bad.

So for example, let’s say, you know right now is 2020 and you want to invest in the newspaper company. And is there printing newspapers still? Now you got to ask yourself, well, what stage is this company yet? Is it just growing? Is it just starting out? Is immature? Is it declining? And that is really the cycle of an industry is starts as a new industry. For example, like e-commerce, it becomes mature and then eventually it dies out and then there’s a new industry that replaces it. So when you think about that, well, you want to avoid companies with a bad industry, even though if the company is great, even though the company is great, you want to avoid it. So those are the five tips on how you can avoid losing money when you’re investing in the markets. I remember Warren buffet said they’ll lose money. I’ll see you in the next video. So thank you for watching and I hope you enjoyed the video. Please help support me by like subscribe and you can watch the next recommended video here as well. So I’ll see you in the next one.

About the author 

Eric Seto

Investor, CPA (Canada) based in Hong Kong and Vancouver

  • We can easily check any company’s financial statements online. So, it doesn’t matter if we are in China or not. Isn’t it? Am I missing something?

    • Great question. That’s because you assume the financial statements in China are reliable, which is not necessarily the case.

      • Hi Eric
        Any recommendation on banking, insurance and pharmaceutical specially companies working on Corona vaccine.

        • Hi Ravi, as of the time you leave this comment, most of the coronavirus vaccine stocks have already gone up.

          You need to learn how to spot an opportunity before it is too late. This is something Investing Accelerator can help you with.

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