Page 10 - SixMistakesSuccessfulWomenMake22

Mistake #5:

Believing That More Risk = More Reward

As stated earlier, Warren Buffet has two rules when it comes to investing:
Rule# 1: Don’t lose money, Rule# 2: Read rule #1

Many investors have been conditioned to believe that diversification is an effective
method of assuming more risk while protecting against catastrophic loss.

Billionaire investor Warren Buffett famously stated: “Diversification is protection

against ignorance. It makes little sense if you know what you are doing.” In
Buffet's view, studying one or two industries in great depth, learning their ins and

outs, and using that knowledge to profit on those industries is more lucrative than
spreading a portfolio across a broad array of sectors so that gains from certain
sectors offset losses from others.

Unfortunately, not everybody has the time available to exercise Warren’s advice in

full. Fully in receipt of this knowledge, Wall Street created a cookie cutter system
that asks investors a bunch of questions to determine if their risk profile is
conservative, moderate or aggressive. For the most part, this is meaningless.

Having worked in this industry for 20 years, I am very sure that people become
conservative when they are losing money and aggressive when they are making

money on paper, which is better known as statement wealth.

Investment versus Speculation

Benjamin Graham wrote one of the most heralded investment books of all time:
The Intelligent Investor. Once again I will turn to Warren Buffett for some words
of wisdom because everyone agrees he is one of the greatest investors of all time.

th
He wrote the preface to the 4 Edition of the Intelligent Investor. Here’s a brief
excerpt:

“I read the first edition of this book early in 1950, when I was nineteen. I thought

then that it was by far the best book about investing ever written. I still think it is.”
In the book, Benjamin Graham states: “What do we mean by ‘investor’?