If your investment falls by 50% you'll need a 100% rise just to get you back where you started. So when speculating in the stock markets, protecting the money you do have is just as important as making some more. This book is for you if you'd like to have a go at beating the system, but don't want to lose your shirt in the process. Topics covered include: index investing, market timing and trend following, stop loss orders, position sizing, and option spreads. "I found it very easy to understand, not too much jargon..." "I rather enjoyed the experience notes at the end of each chapter..." "..it's nice to be able to learn a few things from others' experiences, good or bad."

Tony Loton has written feature articles for Barclays Stockbrokers "Smart Investor" magazine, as well as authoring the books "Financial Trading Patterns" and "DON'T LOSE MONEY! (in the Stock Markets)".

INTRODUCTION

My inspiration for this book comes from the two rules for investing popularly attributed to Warren Buffett, one of the world's greatest investors.

My paraphrasing of those rules is as follows:

Rule 1 - Don't Lose Money!
Rule 2 - Don't forget Rule 1.

From all the stock market speculation books I've read in recent years one statement sticks in my mind; a statement to the effect that: in the absence of any other strategy, an investor who follows only those two rules will become very rich over time.

I know you want to make money, not just avoid losing it; but to emphasize how important the preservation of capital is, consider this. If your investment falls by 50% you'll need a 100% rise to get you back where you started.

The idea of not losing money seems particularly relevant as I write this. In the period July to September 2007 the financial markets have been shaken by a `credit crunch' induced by a crisis in the US sub-prime lending market. In layman's terms - banks had made (home) loans to less credit worthy folks who then defaulted on those loans when interest rates rose; which meant that banks were less willing to lend money (even to each other); which meant that they had to raise money by other means such as by selling equities on the stock markets. So while this was more of a problem in the money markets than in the stock markets, there was a very noticeable knock-on effect.
Your $10,000 invested in the US Dow Jones index in mid-July 2007 would have been worth less than $8,700 in mid-August; a fall of almost 14% in the space of a month, requiring a subsequent increase of around 15% to get back the initial stake. The story was pretty much the same if your investment was tied to the UK FTSE 100, Paris CAC, or German DAX stock indexes.

How fortunate, then, that in that time I didn't lose any money. In fact I made a little, and was well positioned to take advantage of any subsequent recovery.

Although many books out there claim to unlock the secrets of how to win big by getting into the market at the right time, surprisingly few give more than a passing mention of how to get out of the market when things turn sour; or how to make sure you're not in too deep in the first place. Those are the sweet spots I aim to hit with this book.

In part it's about protecting yourself from the unexpected events that Nassim Nicholas Taleb describes as "black swan events" in his book - unsurprisingly titled - `The Black Swan'.

2007-12-10 Review comments shared by the author...

I'm posting this review as the author, to share comments that I received from reviewers of the original book manuscript:

".. its strength is the personal view of trading..."

".. it derserves a place on the bookshelf of the budding investor."

"I found it very easy to understand, not too much jargon..."

"I rather enjoyed the experience notes at the end of each chapter..."

"..it's nice to be able to learn a few things from others' experiences, good or bad."