Learning To Look Down Before Looking Up - By Sanjay Bakshi (1997)

Thanks to Lincoln for passing this along. More of Professor Bakshi’s old articles and talks are available HERE.

While evaluating any investment opportunity, conservative investors always look down before they look up. They ask, "what can go wrong with this investment?" before they ask "what can go right?" Aggressive players, on the other hand, always look up before they look down, and sometimes they don't look down at all.

At times, such aggressive players produce far better returns than conservative investors. This was, for example, the case in 1993-94 when a large number of individual as well as institutional players, made fortunes in The Great Indian Primary Market Boom. These fortunes were made by those who were only looking up, never looking down. Conservative investors, who did take the pains of looking down before looking up, kept well away from the primary market. Consequently, they did not make the fortunes that others made. What's more important, however, is that such conservative investors also did not suffer from the horrendous losses subsequently produced by aggressive players as a result of The Great Indian Primary Market Bust. Fortunes made were not kept.

Therefore, even though there will be times when aggressive players will do far better than conservative investors, in the long-run it is the conservative investors who will make and keep their fortunes.

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In looking at any investment opportunity, the single most important question that a conservative investor asks is, "What have I got to lose?" Only when he is confident that investment risks can be controlled or minimised does the second question come up: "How much can I make?"

Conservative investors who have learned to ask the above questions in the correct order are the ones who are likely to make and keep their fortunes. As Warren Buffett once put it: "To finish first, you have to first finish."