Tuesday, October 10, 2006
Business and investing quote of wisdom of the week
"Never throw good money after bad money"
In this, for example, it means if one had made a bad investment in a business with bad economics. He should never invest more money in the business or any new equipment or ideas that are presented to him to turn the business around. In the case of Mr Buffett's purchase of Berkshire Hathaway in the early '60s, the operating managers then kept going to Mr Buffett with proposals to invest in new machineries in the hope to turn the business profitable. However, this is a case where new technologies do not benefit the owners but it will benefits the consumers, think in terms of airline and more recently, computers business. Knowing the new technology will not turn the business profitable, he stood his ground to invest in places where his cash can churn out better.
Another example is the so-called "dollar averaging method" in investing, any method that suggests averaging means you will always be average, if the average of the market is negative, you'll the same as well. And in a way, by constantly pumping in principal, there'll also be time when you are using good money to chase after bad investment or money.