If you asked for investment advice from the world’s greatest investors, the message would be the same…

Sure, their investment philosophies would differ, but their guiding principles on what it takes to be successful wouldn’t. Every one of them would cite one single thing as the key ingredient to building wealth. And that’s risk management.

#-ad_banner-#Hedge Fund founder Paul Tudor Jones has a trading manifesto with 21 rules. The majority of them deal with risk management. For example, Rule No. 3 is “If I have positions going against me, I get out; if they are going for me, I keep them.” In other words, he cuts his losers short and lets his winners ride.

Rule No. 5: “Don’t ever average losers.” Said another way, don’t throw good money after bad.

Rule No. 10: “The most important rule of trading is to play great defense, not offense.” In other words, protect and preserve the capital you’ve made.

Rule No. 17: “Don’t focus on making money; focus on protecting what you have.”

American financier Bernard Baruch, whom after success in business devoted his time to advising U.S. Presidents Woodrow Wilson and Franklin D. Roosevelt, wrote in his 10 Rules of Investing, “Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.”

Even Warren Buffett’s No. 1 rule in investing is to “Never lose money.” Followed closely by rule No. 2, which is, “Don’t forget rule number one.”

I could go on and on with quips from famous investors, but they would all be like the ones I’ve shared above. And that’s because there are only a few basic “truths” of investing that all the great investors have learned over time.

Action To Take
These are truths that have been forged from years of mistakes, miscalculations and trial-and-error. Likely similar to mistakes that you and I have made (or will make). Hopefully, we can learn from the knowledge they share to avoid many of the same painful blunders they made — especially not cutting a loser quickly enough.

I can’t overemphasize the importance of being willing to cut a loser. Don’t let a bad trade turn into an investment. And as Art Huprich, chief market technician at Day Hagen Asset Management, once said, “Realize that a loss in the stock market is part of the investment process. The key is not letting it turn into a big one as this could devastate a portfolio. It’s not the ones that you sell that keep going up that matter. It’s the one that you don’t sell that keeps going down that does.”

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