Avoiding Common Stumbling Blocks 223is like crossing the street after only looking straight ahead.
The destination might be clear, but without looking left and
right, the consequences can be perilous. All investors surely
want their capital to appreciate over time, but the first order
of business is to ensure that your capital doesn ’ t deteriorate
over time. Attention to capital preservation, first and fore-
most, enables the magic of compounding really to magnify
the value of your portfolio over time.
Interpreting market volatility as a destroyer of opportunity
when it is instead a creator of opportunity. If your approach
is sound, then volatility allows you to buy that which was
cheap yesterday cheaper today. In March 2009, the many
market indexes were off over 50 percent since the market
peak of October 2007. Interestingly, the vast majority of
investors are very afraid of investing in the stock market
now, while back in 2007, when most security prices were
three to five times higher in price , people were pumping in
capital at a record pace.
While it is emotionally difficult to invest money amid
falling prices, successful value investors understand that
exploiting market volatility helps plant the seeds for future
market - beating results.
Believing you are investing when in fact you are speculating. To
an investor, a stock represents a fractional ownership inter-
est in a business. To a speculator, a stock is a symbol with
price movements. Thus, investors make their buy - and - sell
decisions based on the fundamental performance of the
business and how the current price of the security compares
with the value of the security. Investors understand that in
order to make a profit from a stock investment, one of three
things must happen:- The business must generate free cash flow to distribute
back to investors or use the cash to grow the business
which reflects in a higher stock price.
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