Richard Livingston

Hold it: Remember Warren Buffett’s first rule.

Often regarded as the world’s most successful investor, Warren Buffett says the first rule of making money is never to lose money.

To get more Money more often, why not follow us on Twitter? We’re @FairfaxMoney

His second rule is never to forget rule number one. It’s not as simple as avoiding loss-making investments – the very best investors can’t manage that – but the first rule of making money is ensuring you don’t blow gigantic holes in your retirement savings or jump aboard a perennially losing strategy.

So how do you avoid doing just that?

Advertisement

Questions like this are sometimes best answered by turning the proposition on its head. So, as a guide to what not to do, let’s ask ourselves what’s the best way to lose money?

Money can be lost in either a single bang or eroded over time. Let’s think first about how to lose a big chunk of your savings.

A decade or so ago the best approach would have been the managed agricultural scheme. These deals – often characterised by investors paying exorbitant upfront fees to buy expensive land, on which they’d plant the wrong things based on inflated forecasts – were as surefire a way to lose money as it gets.

What’s the modern-day agricultural scheme?

There’s no equivalent but my choice for an alternative is attending a free get-rich-quick property investment seminar. That’s not a prediction of doom and gloom. Property experts don’t buy attractive, well-priced properties at these things. Seminars are where expensive, unattractive properties are sold to non-experts, often accompanied by poor advice.

The Australian Securities and Investments Commission (ASIC) is slowly catching up with the shonks so perhaps it won’t last, but for now property investment seminars remain the best bet for toasting your retirement nest egg.

Where else can an investor keen to vaporise their superannuation balance turn?

Eviser asset allocation expert, John Nunan nominates margin lending (and similar products) as the next best way to lose your money. Preferably you’ll borrow lots against a small number of shares (even better if the companies face similar risks). To demonstrate the potential of this money-losing strategy, consider a simple example: a portfolio of BHP and RIO shares purchased in April 2011. Let’s say you contributed 40 per cent of the purchase price and borrowed the rest through a margin loan arrangement.

By August that year, if you couldn’t meet the margin calls (depositing additional funds) you’d have been sold out by your lender for a loss of roughly half of your capital. By October, you’d have lost more than two-thirds.

Even a property seminar won’t burn your savings that quickly.

But it’s also true that things can work out spectacularly well with margin lending. If you’d bought the shares in August the following year you’d have made a big short-term gain.

This makes margin lending more of a gamble than a sure-fire money loser. If you don’t want to risk making money, stick to the property investing seminars.

If you’re happy to take a bit more time in your loss-making efforts, a useful rule of thumb is to invest in a product that includes the word guaranteed.

An income guarantee is a tell-tale sign that a product won’t repay your capital. If it has a capital guarantee instead, you won’t make much income.

A final suggestion for losing money is to answer an advertisement from the wealth management arm of a financial institution or a larger dealer group.

You won’t do your dough quickly (although it’s possible) but you can be confident they’ll get you into expensive, poorly performing in-house products, onto a pricey platform or sign you up for an insurance policy that doesn’t suit your needs.

The list is endless but I’ll stop there and ask: have you noticed the theme? The consistent feature of all these loss-making strategies is that they’re heavily marketed.

If you’re not looking to lose money here’s another rule: good investments aren’t sold loudly, they’re bought discretely.

Richard Livingston is a founder of Eviser (www.eviser.com.au ).