While offense is crucial and exciting, defense – less noticeable and less glamorous – is the foundation of successful investors as well as successful sports teams. As legendary Alabama Football Coach Bear Bryant used to say: ‘Offense sells tickets, defense wins championships.’
What does defense mean in investing? It means: (a) minimizing the number of long-term losses and (b) avoiding big losses in your investment program. How do you do this?
We believe that our defense-minded, value and growth-focused strategy at Red Pine is investing best practices because it provides a framework for making decisions that can be reduced to fundamental principles that are geared to decreasing risk and increasing return potential.
- The principle of buying assets for less than they are worth [a value focus] simultaneously increases the potential for gain and decreases the potential for loss.
- The principle of investing in good-quality businesses that are cash flow positive and profitable and appear capable of growing at above-average rates over the long term [a growth focus] also adds to the investment potential and subtracts from the investment risk.
Rule #1 in investing is: don’t lose. Rule #2 is don’t forget rule #1. Ben Graham
The long-term goal of growth is not just to make gains, but to avoid losses. Phil Fisher
Investing defensively made sense to legendary financial educators, Graham (1894-1976) and Fisher (1907-2004), as it does to their most renowned student, Warren Buffett. Investors who take the time to learn the principles of Graham, Fisher and Buffett are less likely to make emotional decisions [greed, fear, envy, etc.] that get in the way of most people and cause them sizeable harm.
A defense-minded game plan for helping minimize losses and maximize returns:
- Invest in funds/businesses with proven track records, strong ethics and great cultures.
- Know the difference between intrinsic value (true worth) and market value (stock price).
- Keep in mind that growth in intrinsic, real-world values drive long-term investment returns.
- Resist the urge to buy unwisely in rising markets or sell unwisely in declining markets.
Knowing what you’re doing is your best offense and your best defense in investing.