Focus On The Downside

Many times when we’re looking at a stock to buy we think about the potential upside to the investment. We like to hope and dream about how much money we can make and what we’ll do with it when we get it. This way of thinking can lead to trouble however because we neglect to assess the downside risk to the investment.

Here’s a video of Cramer talking about how professional investors focus on the downside risk before buying into an investment.  He talks about company stock buy-back plans and dividends and how they can act as a buffer when the stock is going down.  Another good thing to look at is how much debt the company has and whether it has enough cash coming in to pay it and run the business.

P.S.  One of the best books that addresses this subject is The Intelligent Investor by Benjamin Graham.  Graham discusses in detail how to avoid catastrophic losses by focusing on buying investments with a “margin of safety”.  This tip is one of the reasons why Warren Buffett is so successful.  Check it out if your serious about investing.