We all feel that stomach-drop when the market plunges. We see our portfolio in the red and our first instinct is to panic.
But what if that’s the wrong thing to worry about?
A bumpy ride isn’t the same as the plane crashing. The biggest mistake retail investors make is confusing temporary volatility with permanent loss.
The real danger isn’t a stock that goes down. The real danger is a stock that goes down and never comes back.
🛑 The Real Risk: Permanent Loss
Let’s get this straight:
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Volatility is when a great company’s stock (like Apple or Google) drops 20% with the market but, you’re not worried, because you know its long-term value is intact. You just have to ride out the waves.
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Permanent Loss is when you buy a “hot” stock, it drops 50%, and only then do you realize you overestimated its potential. It wasn’t a “dip”, it was just finding its true, lower value. You were wrong, and that money is gone for good.
This is the one thing we must avoid. The “Holy Grail” of investing isn’t finding the next 100x stock. It’s eliminating the chance of permanent loss.
If you can get the downside right, the upside will take care of itself.
🛡️ How to Build a “Defense-First” Portfolio
So, how do you avoid this fatal drop? You stop obsessing over “how much can I make?” and start obsessing over “what’s the absolute most I can lose?”
This means calculating a company’s worst-case scenario value before you buy.
We only want to buy stocks that have a built-in safety net. These tend to fall into two simple categories:
1. The “Fortress” Stocks (Economic Moats)
These are companies with a powerful, protective barrier, an “economic moat”, that competitors can’t cross.
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What it looks like: Think of a company with an untouchable brand (Coca-Cola), a powerful network effect (Google’s search), or high switching costs (Microsoft’s software for businesses).
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Why it’s safe: The moat protects the company’s profits, making its future cash flow more predictable. This makes it much easier to value and feel confident that it will be more valuable in 10 years, even if the market is crazy today.
2. The “Garage Sale” Stocks (Hard Assets)
These are companies where the “stuff” they own is worth more than the company’s entire stock price.
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What it looks like: Imagine a company’s stock is worth $100 million (its market cap), but it owns $150 million in debt-free real estate, cash, or valuable inventory.
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Why it’s safe: Even if the “business” itself is struggling, the hard assets provide a solid floor for the value. You’re essentially buying $1.50 worth of assets for $1.00. The downside is tiny.
The “Too Hard” Pile
What about all the other stocks? The exciting, high-growth, “what-if” stories?
If a company has neither a strong fortress nor a safety net of hard assets, it goes in the “too hard” pile.
We aren’t smart enough to predict the downside of those, and you don’t have to be. You win the championship with a great defense, not just by making risky, all-or-nothing plays. Win by not losing.
What’s one “Fortress” stock you own that you’d feel comfortable holding through a crash? Let me know in the comments!
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