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2024/07

What does “Capital Preservation” really mean in investing?

It’s time for a daily article again. Today, let’s discuss an important topic: capital preservation.

Why bring this up? Many people ask, “Can this product (investment) guarantee capital preservation?”

In traditional financial investment concepts, especially in Australia, only government bonds and bank deposits up to $50,000 can be considered capital-preserving. All other investments carry risks. It’s well-known in investment circles that high returns inevitably come with high risks. Government bonds and term deposits are your best options if you want risk-free capital preservation.

However, most people think capital preservation refers to the money they invest. But in reality, whether in investments, life, or even our lifetimes, we constantly need to preserve our “capital,” which is not just money. It includes our principles, bottom lines, values, and responsibilities.

Does this sound too abstract? What does this have to do with investing? A lot!

In financial markets, opting for capital preservation means avoiding excessive financial risks. The principles, bottom lines, values, and responsibilities I mentioned can help us make different investment choices.

For example, with the same AUD100,000, you could buy government bonds or invest in property bridge loan funds. You could choose simple, modest manufacturing sectors or seemingly booming P2P products.

Every choice we make is a decision on whether to preserve capital.

In 2021, at a Berkshire Hathaway shareholders meeting, some investors questioned Warren Buffett’s conservative investment strategy. At the same time, Cathie Wood, who became famous for her heavy investment in Tesla in 2020, was thriving and seemed poised to surpass Buffett as the new investment guru. However, just two years later, her fund plummeted by 40%, while Buffett’s fund continued to show stable, mature returns, ultimately surpassing Wood’s performance by a significant margin.

This is not to say Wood’s strategy is terrible. The point is, if you were a follower of Buffett but felt tempted by another manager’s impressive short-term performance, would you doubt your initial decision? The questions: What drove your decision to invest in a particular product or fund? Was it merely the promise of high returns? If your decision is based solely on these factors, your risk of future failure is high.

This is similar to young people in love—if a girl is attracted to a boy because of his luxury car and expensive clothes, she might overlook the more profound truth.

Before making any investment decision, we must determine whether the stock, product, or fund aligns with our “capital.” If you choose companies or fund managers willing to forsake principles for profit, no matter how well-packaged they are, they have already failed in preserving capital.

Everyone knows their bottom line. Once crossed, you’ll feel uneasy, worried, and insecure. When you experience these feelings, it’s a clear signal that capital is not being preserved.

Focusing solely on technical charts and indicators to find clear signals for increasing returns or preserving capital is unsustainable in the long term. My years of experience with failures, lessons, and short-term successes have taught me that preserving our “capital” is crucial in every action we take, not just investing.

When you ask, “Can this product guarantee capital preservation?” you’re not looking for financial assurance. You lack a sense of security and certainty about where your money is going. You want to make money but fear compromising your principles and values.

The answer is unequivocally no. Remember: If you abandon your “capital” for high returns, those returns will likely be short-lived.

Over decades, Buffett has proven that holding onto your “capital” yields consistent returns.

So, when you invest, select products and sectors that allow you to preserve your “capital.”

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