6 Steps to take when you "tio" Toto or 4D!

Note: This article is from J.D. Roth, who founded Get Rich Slowly in 2006.

When my father died in 1995, he left behind a small life insurance policy that awarded each family member $5,000. It wasn't much, but it was the best he could do based on the fact that he had cancer. He hadn't been much of a planner, and hadn't been good with money, so that $5,000 per person was actually a significant amount.

At the time, I was deep in debt. I had over $20,000 in credit card balances, and was gradually adding more all of the time. If I'd been smart, I would have taken the proceeds from my father's life insurance and used them to immediately repay $5,000 in debt. But I wasn't smart.

I used $1,000 to pay off debt (and patted myself on the back for it), but spent the rest on a new computer, software, and accessories. It didn't take long to realize that this was a dumb decision.

You see, when you receive a windfall, whether it's a tax refund, an inheritance, a gift, or from any other source, it's like you've been given a second chance. Although you may have made money mistakes in the past, you now have a chance to fix those mistakes (or some of them, anyhow) and start down the path of smart money management.

It can be tempting (as I well know) to spend your windfall on toys, trips, and other things that you "deserve," but doing so will leave you in the same place you were before you received the windfall. And if that place was chained to debt, you'll be just as unhappy as you've always been.

Since my father died, I've received a few other small windfalls (and a very large windfall when I sold Get Rich Slowly). With time, I've developed a system for handling these situations.

If you receive a chunk of cash, I recommend that you:

1. Keep 5 percent to treat yourself and your family. Let's be realistic. If you receive $1,000 or $10,000 or $100,000 unexpectedly, you're going to want to spend some of it. No problem. But don't spend all of it. I used to recommend spending 1 percent of a windfall on yourself, but from talking to people, that's not enough. Now I suggest spending 5 percent on fun. That means $50 of a $1,000 windfall, $500 of a $10,000 windfall, or $5,000 of a $100,000 windfall. Don't be tempted to spend more!
   
2. Pay any taxes due. Depending on the source of your money, you might owe taxes on it at the end of the year. If you forget this fact and spend the money, you can end up in a bind when the taxes come due. Consult a tax professional. If needed, set aside enough to pay your taxes before you do anything else.
   
3. Pay off debt. Doing so will generally provide the greatest possible return on your investment (a 20 percent return if your credit cards charge you 20 percent). It'll also free up cash flow; if you pay off a card with a $50 minimum monthly payment, that's $50 extra you'll have available each month. Most of all, repaying debt will relieve the psychological weight you've been carrying for so long. Don't underestimate the feeling of freedom that comes from no longer having creditors.
   
4. Fix the things that are broken. After you've eliminated any existing debt, use your windfall to repair whatever is broken in your life. Start with your own health. If you've been putting off a trip to the dentist or a medical procedure, take care of it. Do the same for your family. Next, fix your car or the roof or the sidewalk. Use this opportunity to patch up the things you've been putting off.
   
5. Deposit the rest of the money in a safe account. It can be tempting to spend the rest of your windfall on a new motorcycle or new furniture or new house. Don't do it. Take some time to breathe. After attending to your immediate needs, deposit the remaining money in a new savings account separate from the rest of your bank accounts. Be sure that the account is as difficult to access as possible -- no ATM card, no easy transfer to your other accounts, no nothing.
   
   [On a side note, IMO, the rest of the money can be better invested in ETFs or even insurance in the long run, guaranteeing you a large sum of money as your nest egg in the future with minimal risks involved]
   
6. Make a wish list. Allow your initial emotion to pass, getting over the urge to spend the money now. Live as you were before. Meanwhile, spend some time learning how far your windfall could go. Most people have unrealistic expectations about how much $10,000 or $100,000 can buy. Resist the temptation to spend the money now, but do run the numbers to see what you could buy.

In the end, it's often best to take the remainder of a large windfall and invest it for growth.

You've already repaid your debt and fixed the things that are broken, both of which are methods to spend on your past. You've also used 5 percent to treat yourself and your family, which is money spent on your present. The smartest move with the rest of the money is to spend on your future by funneling the funds into an investment account. (If you don't know how to do this, consult an investment professional.)

When I sold Get Rich Slowly in 2009, I received a large windfall. The old J.D. would have gone crazy with the money. The new, improved model of me was prepared, however, and made measured moves designed to favor long-term happiness over short-term happiness. Yes, I spent some money on new furniture and a trip to Europe. But I also set aside money to pay my taxes and to fix the problems in my life. (I was 50 pounds overweight in 2009, so I allocated $200 per month to becoming fit.)

Today, the bulk of my windfall still sits in the same place it's been for the past five years: an investment account. When first I put the money there, I thought I might use it for something in the not-so-distant future. That didn't happen, and now I've had time to get used to the idea that I have a large chunk of money that can act as a sort of "personal insurance." That cash eases my mind. It helps me sleep easy at night. And that's more rewarding than spending it on new toys could ever be.

What to learn from the Founder of Million-dollar Game - Monopoly

Let’s take a look at the life of a man who has been attributed as the first game inventor to become a millionaire.

Charles Darrow was an unemployed salesman and inventor living in Germantown, Pennsylvania, who was struggling with odd jobs to support his family in the years following the great stock market crash of 1929. Remembering his summers spent in Atlantic City, New Jersey, Charles spent his spare time drawing the streets of Atlantic City on his kitchen tablecloth, with found pieces of material and bits of paints, wood etc. contributed by local merchants. A game was already forming in his mind as he built little hotels, houses and other tokens to go along with his painted streets.

Soon friends and family gathered nightly to sit around the kitchen table to buy, rent and sell real estate, all part of a game involving spending vast sums of play money. It quickly became a favorite activity among those with little real cash of their own.

The friends soon wanted copies of the game to play at home (especially the winners.) The accommodating inventor began selling copies of his board game for four dollars each. He then made up a few sets and offered them to department stores in Philadelphia. Orders for the game increased to the point where Charles decided to try to sell the game to a game manufacturer rather than going into full-scale manufacturing.

He wrote to Parker Brothers to see if the company would be interested in producing and marketing the game on a national basis, but the company turned him down, explaining that his game contained “three fundamental errors” including: the game took too long to play, the rules were too complicated and there was no clear goal for the winner.

Undeterred Charles continued to manufacture the game, and hired a printer friend to produce five thousand copies. He had orders to fill from department stores including F. A. O. Schwarz.

One customer, a friend of Sally Barton, daughter of Parker Brothers’ founder, George Parker, bought a copy of the game. The friend told Mrs. Barton how much fun Monopoly was, and suggested that Mrs. Barton tell her husband, Robert B. M. Barton, who was the then president of Parker Brothers. Mr. Barton listened to his wife and bought a copy of the game.

Not long after he arranged to talk business with Charles in Parker Brothers’ New York sales office, offering to buy the game and give him royalties on all sets sold. Darrow accepted and permitted Parker Brothers to develop a shorter variation of the game, added as an option to the rules.

The royalties from Monopoly made Charles Darrow a millionaire, the first game inventor to make that much money.

So what can we learn from this?

Here are ten million dollar ideas drawn from the example of Charles Darrows…

1. Think – Take time to think. Pause from your busy life and think.
2. Identify – Identify a problem and seek a solution. Stay alert.
3. Explore – Delve into new areas of thought with fresh eyes. ‘Livingstone, I presume?’
4. Doodle – Keep a journal and write down ideas whenever they come into your head. Keep a record.
5. Review – Go over your records of old ideas. There is a season for ideas. It may have been winter the last time you looked, but now it may just be spring.
6. Experiment – Try things. Don’t discount anything until you have exhausted all the possibilities and then some.
7. Brainstorm – Pull together a team and throw up your ideas. Write down what your team comes up with. This is the place for idea multiplication.
8. Initiate – Don’t wait for a publisher to recognize you. Self-publish. Charles Darrow created the game long before the ‘big guys’ ever noticed.
9. Twist – Look at existing ideas and add your own unique twist to make it faster, smoother or better. There is always another way.
10. Succeed – Turn recess into success by just staying committed to yourself and your ideas.

With those ten ideas activated you will be in a position to turn any recession into a powerful succession.

And when it comes to succession – participate!

information source: en.wikipedia.org/wiki/Charles_Darrow

Post written by Peter G. James Sinclair.

Different types of Alternative Investments

As i browsed through the financial readings for the night, I saw this particular watch that is selling for an astonishing price I can ever imagine.

Guess the Price?

Its selling in The Hour Glass for S$150,700! I can only use one word to describe - disbelief. S$150k can buy me a car straight or used as downpayment for a condo or something... And what if you drop it on the floor accidentally? Ouch!

Then again, it spurred my thoughts to head another way - Alternative Investments.

Types of Alternative Investments

Offhand, I can name just a few like Gold, Wine, Watches, Collectible Coins etc... Wanting to know more, i did a search and i realize basically; An alternative investment is any investment other than the three traditional asset classes: stocks, bonds and cash!

So practically many other things like fine art, private equity or real estate are considered alternative investments too! 

Let's take a look at some of the popular ones most investors will pursue (considering hedge funds, private equity are only limited to accredited investors with S$1million or more):

Coins

The collectible coins are valued, not for their weight in precious metals, but because of their scarcity. Popular collectible coins include Morgan dollars, Walking Liberty half dollars and certain Buffalo Nickels. 

Many factors influence how valuable a particular coin can be such as:

1) condition, 

2) which mint mark it carries and 

3) the year of issue. 

Mint condition coins are always more valuable than coins that are heavily worn. Certain years of coins had fewer mintings, making them more rare and valuable [source: Coin World]. For example, some 1918/7-D Buffalo Nickels could be worth as much as $285,000 because the coins were printed with overdates when then 1917 die was impressed with a 1918 hub.

In the coin market, the rarest coins tend to provide huge returns (upwards of 100 percent of their value in a year), while more marginally rare coins provide only modest returns (sometimes as low as 0 percent in a given year). With any investment coins, find a dealer with a good reputation and inspect the coins carefully before making a purchase, as there are always forgeries circulating.

Commodities

There are tons of commodities traded in the futures markets including resources like crops and livestock, fossil fuels such as oil and coal, and precious metals like copper and gold. Nevertheless, the most 2 common commodities people keep a tab on are Oil and Gold prices. 

Do you still remember the financial crisis from the U.S. sub-prime era? During the period, everyone was worried of the hefty debt levels in the U.S. and sought safety in gold; thus Gold sky-rocketed in the aftermath and investors who bought into it early would have seen impressive returns. On the other hand, economies across the globe aren't doing well, and leading to a drag on the oil prices.

There are various ways to buy into commodities (you don't have to buy the actual stuff and store in your house!). One is to buy into commodity futures through a broker which involves leverage or stocks/companies that are into the mining or supply of the relevant commodities. 

Lastly, if you wish to seek diversification, you can also go for exchange traded funds (ETFs) where you can purchase several different commodities at one go, rather than focusing on one. ETFs can eliminate some of the uncertainty from choosing which commodities might rise and fall at a given moment too.

Real Estate/Property

Historically, real estate has been a very popular alternative investment especially in Singapore as people view it as a form of retirement scheme. History has proven itself as many rich people in Singapore do that due to the rise in property prices in the past few decades. 

Buying rental property can usually provide steady, reliable income if you find the right tenants. What's better than having someone else pay for your housing loan and to own a house debt-free at the end of it? This is a way to beat inflation and to take advantage of leverage in the best form, provided that the "ingredients" are well in place.

In contrast, if you are afraid of the hassle of owning a physical property, you can always turn to real estate investment trusts (REITs). They offer a more hands-off, low-risk method of investing in real estate. 

An REIT is a group that invests in various real estate properties, and receives preferential tax treatment from the government in exchange for paying most of its income to shareholders. Investors can purchase shares of REITs on public exchanges, making them one of the more liquid alternative investments. Another upside is that, like stocks, shares in REITs pay out regular dividends.

Bottom-Line

Historically, many of these alternative investments have been more popular among high-net-worth individuals and institutional investors. That's because many alternative investments require larger initial investments than stocks or bonds and are usually less liquid. 

But despite that, there are some advantages to alternative investments. Read on to find out those advantages, and educate yourself before you dip your toes into those murky waters.

Small Changes = Huge Results

Saving a lot of money is like trying to run a marathon. If you dwell on how long the race is, you might not even get off the couch. But if, instead, you focus on putting one foot in front of the other and running one mile, and then two miles, and so on, suddenly a marathon doesn't seem quite as intimidating. Try to think about your finances in the same way.P

This post originally appeared on LearnVest. P

Minor changes that you make right now can have a major impact on your long-term financial security, according to Stephany Kirkpatrick, senior director of financial planning and aCertified Financial Planner at LearnVest Planning Services. Below, she shares eight quick and easy tips that can help you slowly and steadily stash away cash—and we profile real people who've put them to the test, much to the benefit of their bottom lines.P

Open a Separate Savings AccountP

Simply put, you want to keep your checking account and savings account at two different banks. Erica Zidel, 31, of Boston, Mass., who runs the babysitting startup SittingAround.com, says that this is the single best thing she's done to save money. "I kind of forget that I have the savings account, so I'm not tempted to dip into it," she says. "Since doing this five years ago, my savings have grown 400%."P

Kirkpatrick agrees that the out-of-sight/out-of-mind mentality is helpful—plus, it usually takes two to three days to access money from a separate savings account, so you probably can't spend it as impulsively.P

Set Up an Automated TransferP

It's easy to promise yourself that you're going to transfer a certain amount of money into savings each week or month, but following through takes an awful lot of time, energy and discipline. Take the process out of your own hands by either asking your company to regularly deposit a portion of your paycheck directly into your savings account (that's ideal, says Kirkpatrick, because you never even see the money) or asking your bank to regularly transfer a certain amount of money from your checking account to your savings account.P

"My husband and I set up an automatic transfer with our bank between our checking and savings accounts, " explains Kendal Perez, a 28-year-old marketing manager at Kinoli Incorporated in Fort Collins, Colo. "Each week, $50 is transferred, and we don't typically miss it. That has helped us build an emergency fund and cover costs like car insurance and vehicle registration." And do it frequently: "If you transfer from checking to savings, I recommend weekly transfers, because they keep your checking account more level. You won't feel a huge dip once a month," says Kirkpatrick.P

Bring Your Lunch to WorkP

Did you know that the average American who eats their lunch out during the week spends nearly $1,000 a year? Stuart L. Cantor, Ph.D., a 49-year-old pharmaceutical scientist in Mt. Airy, Md., used to be tempted to go to a Chinese or Indian restaurant with co-workers for lunch on occasion and drop $12 to $15 each time.P

"Now I bring my lunch to work every day. Either my wife and I will cook something or I'll microwave a frozen Indian dish that costs $1.99 for 14 ounces. I always eat something healthy and delicious, so I don't feel cheated," he says.P

"The key to making this habit stick is to make sure you're not taking an enjoyment factor out of your life," says Kirkpatrick. "Have one or two splurge days if you need to. Bringing your lunch 3 or 4 days a week is still better than none." Ask your co-workers if they want try this strategy too and eat with you, so you'll get the same sense of camaraderie that you would at a restaurant and they'll help hold you accountable.P

Just Add 1% P

Add 1% of your gross income to your retirement savings every six months. The idea is to keep doing this gradually until you reach the maximum amount that you're allowed to contribute. Maximums can change year to year. For traditional or Roth IRAs, for example, the current limit is $5,500 (and $6,500 for those 50 or older). For 401(k)s, it's $17,500 for those under age 50 and $23,000 for those age 50 or older. P

"1% is a good amount because it's a painless but significant step in the right direction. You can live without that small amount of money," says Kirkpatrick. If you are contributing, say, 2% right now, within about 4 years you'll slowly grow that amount to 10% without even feeling it by following this strategy.P

Track Your Spending for One Month P

Before you can spend less, you need to figure out exactly where your money goes. You might think you have a good idea, but many people are surprised by what they find.P

Hudson Valley, N.Y. writer Virginia Sole-Smith, 32, certainly was when she used a spreadsheet to track what she and her husband spent on groceries in May and June of this year. But the exercise helped her pinpoint areas where she could slash costs. "We were spending $75 a month on individual, 6-ounce Chobani yogurts at a fancy grocery store! Now we buy four-packs and 32-ounce tubs from Stop & Shop," she says. Tricks like this have enabled her to cut her yogurt bill nearly in half and spend 37% less on all her groceries.P

"Pay attention to recurring costs, like cable TV bills and gym memberships. Ask yourself if you're getting your money's worth," says Kirkpatrick. If you're not, it might be time to buy an HDTV antenna (a one-time fee) or pay for Hulu or Netflix (which are recurring fees but are less expensive than cable). Or you may want to watch free exercise videos on YouTube instead of taking gym classes.P

If your weak spot isn't a recurring cost, try putting yourself on a cash diet, says Kirkpatrick. For instance, if you can't enter a shoe store without purchasing three pairs, don't go in there with a debit or credit card—take only a certain amount of cash, so you can't go crazy.P

Use a Rewards Card WiselyP

"For the past 17 years, my husband and I and our five children have saved by charging everything on my Southwest Airlines card and paying off the balance in full each month. We rack up free miles so we can visit family in Raleigh and take vacations, like a trip to San Francisco, at much lower costs," says Andi Wrenn, a 46-year-old financial counselor in Arlington, Va."Over the past four years, we've earned anywhere from 3,000 to 12,000 miles per month." P

This tactic can be advantageous, Kirkpatrick agrees. "But only if you spend within your means and pay off the balance in full every month, so you have to stay disciplined," she advises.P

Set RemindersP

One big money drain can be forgetting to pay a bill—and then getting slapped with a late fee and/or having to pay interest on a credit card payment. This can be easily avoided by getting organized.P

"I started using a hard copy planner (and then a few years ago, I switched to using a Google digital calendar) to record reminders throughout the year for different money deadlines, such as paying monthly bills, contacting my tax professional, reviewing insurance policies, getting a credit report and more," says Ray Advani, 42, of Chicago, who founded the blogSquirrelers.com.P

"Over the past 10 years, this has saved me about $1,000 and prevents a lot of stress!" he adds. You can also schedule alerts via email or text. "Setting reminders is a helpful strategy for people who lead busy lives," says Kirkpatrick. "You can also ask vendors, like your cable company or electric company, if they can reset your payment due date. You might prefer to have all your due dates on the same day for convenience or it might help your cash flow to spread them out over the month."P

Move Your Savings to an Online BankP

"Consider putting your savings into an online bank, as opposed to a brick-and-mortar bank, because the interest rates tend to be higher, so your money will grow faster," says Kirkpatrick. For example, if your emergency fund sits in Citibank's savings account, it'll earn .01% interest. If it sits in Ally online bank's savings account, it'll earn .87% interest. And, as this story shows, even little differences can add up.

Bitcoin Boom Bust

Around a month ago, I wrote about the pros and cons of investing in Bitcoins - link here (yes, i am a Fool.sg contributor) :)

One of the key risks I talked about was about the overwhelming chances that it is can be used for fraud or manipulation - like a black market for money laundering.

True enough, just a month plus later, it is going down with one of the biggest exchange shutdown and its founder MIA. Here is the article...

One may wish to exercise caution when moving into such risky ventures; i remember hearing one celebrity buying almost 400K of Bitcoins back when i wrote the previous article. Hope he has cashed out his holdings! And you should too...!

Should I invest or pay my credit card debt?

By Sunshine Santiago

Do you suddenly find yourself having extra cash after a few months’ worth of saving? And now, your next question is: should I invest this extra money or should I just use it to pay my credit card debt?

Some financial advisors will tell you to just continue paying the minimum charge for your credit card. That way, you can save your extra money for your retirement or for a big event or a big purchase that you are planning. On the other hand, some finance experts think that it is better if you just pay off your credit card debt first that way you have less to worry about. Below are some points to consider in making the decision:

1.      Do you have money set aside for your emergency fund?

Making an investment and completing your credit card payments requires extra cash that you will not use for your daily expenses.  But other than this, ask yourself if you have already set aside an emergency fund you can turn to for accidents, illnesses, house and gadget repairs, and other miscellaneous fees.  If your answer is no, then try saving up money that is enough to tide you over for three to six months. Make saving a habit so that you have enough saved for an emergency fund. When you have set aside an emergency fund, then it’s the only time that you can start to plan on any investments.

2.      Consider debt payments as investments.

Debt payments you make usually decrease the amount of loan payments you have to make in the future. Therefore, it enables you to have more money when your debt is completely settled. You may compare credit card debt payments to a bond or a certificate of deposit (CD) which can provide you with fixed rate cash at certain dates in the future.

3.      Decide on which debt you want to prioritise and stick to that plan.

Unpaid high interest rates can lead to credit card problems. Most financial advisors will probably tell you to choose to pay debts that have higher interest rates first before you consider getting other investments.  Similarly, you can also weigh out the return rates of the investment you’re planning to make against the interest rate of not paying your credit card debts on time.  You should be able to figure out the importance of setting the high interest debts you currently have.  Alternatively, you can also opt to settle small debts first so that you will have cash later on that you can use to pay for your bigger debts. Whatever you decide, choose what you think is easier and more convenient for you to do.

4.      Include taxes in your computation.

In deciding whether to invest or to pay off debts, you don’t need to just compare and compute the interest rates of a potential investment project against the interest rates of the debt you will be incurring.  Don’t forget to include tax in your computations and try to ask help from a reliable finance person when you want to know whether your payments will be tax-deductible and whether the interest rate you will gain on your investment is taxable. By considering the tax implications, you will have a clearer picture on the returns of your investment as opposed to paying off all your credit card settlements.

As a conclusion, it is advisable to completely settle your high interest credit card debt and learn about proper debt management and saving before you think about investing your extra cash on other projects. You will be able to focus more on investing when you have peace of mind that comes from being debt-free from your credit card obligations.

Sunshine writes  for CompareHero.my, the most comprehensive financial comparison service in Malaysia.  Compare credit cards, broadband plan, and others at a competitive price.

The Pros & Cons of Share Buybacks

More often than not, Share buybacks are looked upon as a positive catalyst that the company thinks that the prices are undervalued at current levels and they are confident in the prospects further ahead. 

Furthermore, Share Buybacks reduce the company's outstanding shares so that the EPS (earnings per share) are accelerated with the "pie" being shared among lesser people. This enhances the assurance for investors to invest in the company; fuelling the increase of the stock price advancement.

However, there is always two sides to a story and there are downsides too. Let's examine some of the potential benefits and pitfalls of a stock buyback:

Benefits of Stock Buybacks

• Increased Shareholder Value - There are many ways to value a profitable company but the most common measurement is Earnings Per Share (EPS). If earnings are flat but the number of outstanding shares decreases. . Voila! . . A magical increase in period-to-period EPS will result.
  
• Increased Float - As the number of outstanding shares decreases, the shares remaining represent a larger percentage of the float. If demand increases and there is less supply, then fuel is added to a potential upward movement in the price of a stock.
  
• Excess Cash - Companies usually buy back their stock with excess cash. If a company has excess cash, then at a minimum you can bank that it doesn't have a cash flow problem. More importantly, it signals that executives feel that cash re-invested in the corporation will get a better return than alternative investments.
  
• Price Support - Companies with buyback programs in place use market weakness to buy back shares more aggressively during market pull-backs. This lends support to the price of the stock and ultimately provides security for long-term investors during rough times.

Potential Pitfalls

• Manipulation of Earnings - Above, we described how a buyback improves the earnings per share number. Companies which have flat growth can possibly manipulate the EPS and appear to beat consensus estimates that were based on a larger number of outstanding shares.
  
• Execution of Buyback - There is a difference between announcing a buyback and actually purchasing the stock. Unfortunately, there are cases where buyback announcements are made but not implemented entirely. It may initially boost the price of a stock, but this phenomenon (when it occurs) is usually short lived.
  
• High Stock Prices - Re-purchasing shares at all-time high prices are highly risky and doesn't make a whole lot of sense unless there is something in the works that will add substantially to earnings. A classic example is AIG: It bought back shares at prices close to $1,500 during 2004-2007, only to see its stock fall to under $35 before the end of 2008.

Conclusion

Stock buyback programs can be really positive for stockholders if done at the right price and shows a wise use of excess cash when there are no alternatives for better capital allocation. Just keep a watch out of potential hazards like management seeking to cover up weak ratios or poorly managed employee stock option plans.

In my next post, I shall write about 3 well-known companies (Osim, Ho Bee, Sakae) which have performed consistent share buybacks and how their share prices have risen consequently.

Hope you like my post and can do me a favour by "Like"-ing my facebook page at www.facebook.com/kissinvesting. Thanks & HUAT AH!

A nice interview - words of wisdom

The Magic Words Every Trader Says Over and Over

Stansberry & Associates: Brian, you claim "five magic words" are the secret to getting rich in the markets and through investments. You claim every rich investor or trader says these words over and over. Can you share those magic words?

Brian Hunt: Sure… The five magic words – and this works with real estate investing, small business investing, blue-chip stock investing, or even short-term trading – are: "How much can I lose?"

The rich, successful investor is always focused on how he can lose money on a deal, a stock, or an option position. He is always focused on risk. Once he has the risk taken care of, he can move on to the fun stuff… making money.

Almost everyone who is new to the markets or new to making investments is 100% about making money… the upside. They're always thinking about the big gains they'll make in the next Big Tech stock or currency trade or their uncle's new restaurant business.

They don't give a thought to how much they can lose if things don't work out as planned… if the best-case scenario doesn't play out. And the best-case scenario usually doesn't play out. Since the novice investor never plans for this situation, he gets killed.

I've found, through years of investing and trading my own money – and through years of hanging out with very successful businesspeople and great investors – that when presented with an idea, the great investor or trader reflexively asks early in the discussion, "How much can I lose?"

Like I say, this can be a real estate deal, a small business investment, a quick trade, a stock position, or a commodity investment. The concern is always, "How much can I lose? What happens if the best-case scenario doesn't pan out?"

S&A: It's along the lines of Warren Buffett's famous rules of successful investment. Rule one: Never lose money. Rule two: Never forget rule one.

Hunt: Right. Buffett is probably the greatest business analyst to ever live… the greatest capital allocator to ever live. He's worth over $50 billion because of his ability to analyze investments.

When they ask the old man his secret, he doesn't talk about the intricacies of balance sheets or cash flow analysis. The first thing he recommends to folks who want to make money in the market is to not lose money in the market. He's obsessed with finding out how much he could potentially lose on a stake. Once he's satisfied with that, he looks at what the upside is.

So Buffett is your great investor. Now take Paul Tudor Jones, an incredible trader with a net worth in the billions. His interview in the trading bible Market Wizards is the most important thing any new trader can read. His interview is filled with how he's obsessed with not losing money… with playing defense.

Tudor's famous quote is the trader's version of Buffett's investment quote. Tudor says the most important rule of trading is playing great defense, not offense.

If a new investor or trader taped Buffett's quote in a place he'd see it every day… and if he read Tudor Jones' interview once per month… and if he reflexively asks himself, "How much can I lose?" before investing a penny in anything, he'd be worlds ahead of most people out there. He'd set himself up for a lifetime of wealth.

S&A: OK, that covers the theory. How can we put "how much can I lose" into everyday practice?

Hunt: Well, if you're putting money into a startup business, a speculative stock, an option position, or anything else that is on the riskier end of the spectrum, the answer to "how much can I lose?" is usually, "Every last dollar."

While speculative situations can be tremendous wealth-generators, they're best played with small amounts of your overall portfolio. Or if you're a conservative investor, not played at all. Let's say you're buying a speculative gold-mining stock or a speculative tech company with just one potential "big hit" product.

With speculative positions, there is always the possibility that your money could evaporate. This is where the concept of position sizing comes into play. In a speculative situation, you're going to want to put just 0.5% or just 1% of your overall portfolio into that idea. That way, if the situation works out badly, you only lose a little bit of money. You certainly don't want to put 5% or 10% of your portfolio into a speculative position. That's way too big.

S&A: How about advice for conservative investors?

Hunt: I think conservative investors should stick to Warren Buffett-type investments… owning incredible companies with great brand names, like Johnson & Johnson or Coca-Cola. These are the safest, most stable companies in the world.

When you buy companies like this at cheap prices, when they are out of favor for some reason, it's very hard to lose money on them. They are such incredible profit generators that their share prices eventually rise and rise.

My friend and colleague Dan Ferris, who writes our Extreme Valueadvisory, provides advice on how and when to buy these dominant companies better than anyone in the business. He knows exactly what they are worth… and he watches them like a hawk to find the right buy-points for his readers.

If a conservative investor can buy a super world-dominating company like Johnson & Johnson or Coca-Cola or Intel for less than eight or 10 times its annual cash flow, it's very hard to lose money in them. Eight to 10 times cash flow is often a hard floor for share prices of elite businesses. They don't go down past that.

S&A: How about the concept of "replacement cost"? Do you think that's important in the quest to not lose money?

Hunt: A while back, I had lunch with a successful professional real-estate investor who raved about some of the values he found on the east coast of Florida.

The market was wrecked there. There are a lot of sellers who needed to dump right then and ask questions later… So he's found tons of properties that are selling for less than the cost it would take to build the structures if they weren't there in the first place. He's bought properties for less than that rock-bottom value… for less than replacement cost.

Since he is focusing on not losing money… and buying below replacement cost… it's going to be easy for him to make money on his properties. Mind you, he's not raving about price-appreciation potential. His eyes lit up because his downside was so well-protected.

That's the mindset the new investor needs to cultivate. He needs to realize the time to start raving is when he's found a situation where it's going to be difficult for him to lose a lot of money. The upside will take care of itself.

S&A: How about commodities? I know you like to trade commodity stocks.

Hunt: Oh, I love to trade commodity-related stocks… copper producers, oil-service companies, uranium, gold, silver, agriculture. They boom and bust like crazy. And you can make money both ways. I like to say they are "well behaved."

The key to not losing money – which leads to making terrific money – in commodity stocks is to focus your buying interest in commodities that have been blown out… that are down 60% or 80% from their high. Find commodities that have suffered brutal bear markets. The longer the bear market, the better. This is the time that the risk has been wrung out of them.

Every commodity has what's called a "production cost." This is how much it costs to produce a given unit of that commodity. It's similar to the concept of "replacement cost."

After a big bear market in a commodity, you'll often find it trading for below its replacement cost. Sentiment toward the asset will be so bad that nobody wants it. So producers get out of the business… and demand for that commodity increases because it is so cheap. This sows the seeds of a big bull market.

But to get back to covering your downside in commodities, focus on markets that have suffered a terrible selloff or bear market. In these situations, the answer to "how much can I lose?" is often, "Not much… It's already selling at rock-bottom levels."

You can certainly make money in commodities that have been trending higher for a long time, but the sure way to not lose money is to focus on the commodities that have absolutely been blown out.

Gold and gold stocks were a classic case of this in 2001. Gold and gold stocks were such bad investments for so long that everyone who bought in the 1980s or '90s had sold their holdings in disgust. They finally got so cheap and hated that they couldn't go any lower. Then they skyrocketed.

S&A: Good advice… Any parting shots?

Hunt: When you start out in this game, you're as bad as you're going to get. So take supertrader Bruce Kovner's advice and "undertrade."

Make really small bets to get the hang of things… to get the hang of handling your emotions. If you have $10,000 to get started, set aside $7,000 and trade with $3,000 for the first six or 12 months.

But even after going through a training period like this, it's tough to learn not to lose money unless you actually feel the pain of losing a lot of money. It took me touching several very hot stoves and suffering several big losses early on in my career before I learned this.

If I am a skilled trader and investor nowadays, it is only because I have made every boneheaded mistake you can think of and learned not to repeat it. I've learned that you can make great money in the market simply by not making stupid mistakes… by playing great defense.

S&A: Winning by not losing. It works for Buffett and Paul Tudor Jones… So it's probably worth focusing on. Thanks for your time.

Hunt: My pleasure.