{"id":32948,"date":"2025-04-21T23:56:00","date_gmt":"2025-04-21T15:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=32948"},"modified":"2025-04-22T06:48:39","modified_gmt":"2025-04-21T22:48:39","slug":"permanent-capital-loss","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/","title":{"rendered":"Permanent capital loss is the biggest risk investors must face"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/#What_is_investment_risk\" >What is investment risk?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/#Investment_gurus_opinions\" >Investment guru&#8217;s opinions<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/#Buffett\" >Buffett<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/#Howard_Marks\" >Howard Marks<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/#Volatility_is_not_risk_permanent_capital_loss_is\" >Volatility is not risk, permanent capital loss is<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/#Almost_irrecoverable_disaster_to_portfolio\" >Almost irrecoverable disaster to portfolio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/#Causes_of_Permanent_Capital_Loss\" >Causes of Permanent Capital Loss<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/#Closing_words\" >Closing words<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_investment_risk\"><\/span>What is investment risk?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Most of retail investors don&#8217;t care the top risk they should &#8211; permanent capital loss. But before we discuss permanent capital loss, let&#8217;s review what is a risk first.<\/p>\n\n\n\n<p>Regarding investment risk, I personally think that <a href=\"https:\/\/berkshirehathaway.com\/letters\/1992.html\" target=\"_blank\" rel=\"noopener\">Buffett\u2019s 1993 shareholder letter<\/a> provides the best definition: \u201cIn stating this opinion, we define risk, using dictionary terms, as &#8220;the possibility of loss or injury.&#8221;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Investment_gurus_opinions\"><\/span>Investment guru&#8217;s opinions<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Buffett\"><\/span>Buffett<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>&#8220;Charlie and I have an aversion to permanent loss of capital.&#8221; &#8220;I am unwilling to risk a large permanent loss of capital in the pursuit of better long-term performance.&#8221;<\/p>\n\n\n\n<p>&#8220;There is one investing rule at Berkshire that has not and will not change: Never risk permanent loss of capital.&#8221;<\/p>\n\n\n\n<p>In his <a href=\"https:\/\/www.rbcpa.com\/wp-content\/uploads\/2016\/12\/1963.01.18.pdf\" target=\"_blank\" rel=\"noopener\">1962 letter to his partners<\/a>, Buffett wrote: &#8220;I cannot promise results to partners.&nbsp;What I can and do promise is that a) Our investments will be chosen on the basis of value not popularity, b) That we will attempt to bring risk of <strong>permanent capital loss <\/strong>(not short term quotational loss) to an absolute minimum by obtaining a wide margin or safety in each commitment and a diversity of commitments; and c) My wife, children and I will virtually have out entire net worth in the partnership.&#8221;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Howard_Marks\"><\/span>Howard Marks<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Howard Marks, the investment guru, who wrote the book &#8220;<a href=\"https:\/\/www.amazon.com\/Most-Important-Thing-Thoughtful-Publishing\/dp\/0231153686\" target=\"_blank\" rel=\"noopener\">The Most Important Thing<\/a>&#8220;, which I personally think is one of the best books on investment risks, said: &#8220;The risk that matters most is the risk of permanent loss.\u201d<\/p>\n\n\n\n<p>&#8220;I don&#8217;t think most investors worry about volatility. In fact, I&#8217;ve never heard anyone say, &#8216;The expected return isn&#8217;t high enough to withstand all the volatility.&#8217; They worry about It\u2019s the possibility of permanent loss.\u201d<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Volatility_is_not_risk_permanent_capital_loss_is\"><\/span>Volatility is not risk, permanent capital loss is<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Bruce Berkowitz said: \u201cI define risk as the chance of permanent capital loss&nbsp;adjusted for inflation. Volatility, I believe to be just price changes based on market perceptions of risk. Risk does not equal volatility.\u201d<\/p>\n\n\n\n<p>Howard Marks said: &#8220;I don&#8217;t think most investors worry about volatility. In fact, I&#8217;ve never heard anyone say, &#8216;The expected return isn&#8217;t high enough to withstand all the volatility.&#8217; They worry about It\u2019s the possibility of permanent loss.\u201d<\/p>\n\n\n\n<p>David Iben said: \u201cVolatility is not a risk we care about. What we care about is avoiding the permanent loss of capital and, increasingly relevant today, the permanent loss of purchasing power.\u201d<\/p>\n\n\n\n<p>Li Lu, who manages Charlie Munger&#8217;s family investment funds, said: &#8220;In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.&#8221;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Almost_irrecoverable_disaster_to_portfolio\"><\/span>Almost irrecoverable disaster to portfolio<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In my post of \u201cThe larger the portfolio, the lower the return on investment will possibly be over time\u201d, I mentioned: \u201cWhy do famous investors disappear later?\u201d One of the main reasons is that \u201cas long as there is a year\u2019s portfolio return, The rate is extremely low, and it cannot be fully recovered the following year. Most cases will find it difficult to recover, or even never recover from it. &#8220;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Causes_of_Permanent_Capital_Loss\"><\/span>Causes of Permanent Capital Loss<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In my posts of &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/03\/23\/shorting-is-dangerous\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why shorting is extremely dangerous to retail investors?<\/a>&#8220;, &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/08\/21\/no-derivative-products\/\" target=\"_blank\" rel=\"noreferrer noopener\">Never borrow money, shorting, or derivative products<\/a>&#8220;, and &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/09\/10\/wrong-investment-concept\/\" target=\"_blank\" rel=\"noreferrer noopener\">Retail investors&#8217; wrong investment concept not worth trying at all<\/a>&#8220;, I have discussed some common wrong investment behaviors of retail investors. Unfortunately, many of the actions I have listed are the very causes of permanent capital loss.<\/p>\n\n\n\n<p>In summary, the common causes of permanent capital loss include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Take stock market as a gambling place<\/li>\n\n\n\n<li>Flatten down<\/li>\n\n\n\n<li>Chase for touted stocks<\/li>\n\n\n\n<li>Speculative behavior<\/li>\n\n\n\n<li>Swing trade<\/li>\n\n\n\n<li>Borrow money to invest<\/li>\n\n\n\n<li>Stock shorting<\/li>\n\n\n\n<li>Derivative financial products such as warrants, futures, and foreign exchange<\/li>\n<\/ul>\n\n\n\n<p>The reasons listed above are not necessarily the cause, but they are the main causes.<\/p>\n\n\n\n<p><strong>Please note<\/strong>: A total stock market crash is not among the reasons listed above, as history has proven that the stock market will recover after a crash. Unless you sell all your stocks when the stock market is at its most panic-stricken, this action proves that you are not suitable for investing in the stock market.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Closing_words\"><\/span>Closing words<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Bill Ackman put it this way: \u201cThe risk you should be concerned about is the probability that if you invest in a business you will lose money and incur permanent losses.\u201d<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"196\" height=\"100\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2025\/01\/Risk_Loss-Custom.jpg\" alt=\"Permanent capital loss\" class=\"wp-image-32976\"\/><figcaption class=\"wp-element-caption\">credit: i4value.asia<\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"block-d8a344e9-4edc-4dc1-b981-40aa61d258b5\"><span class=\"ez-toc-section\" id=\"Related_articles\"><\/span>Related articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul id=\"block-1b4a90da-e6eb-4658-9995-6b98224c83ec\" class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/04\/21\/permanent-capital-loss\/\">Permanent capital loss is the biggest risk that investors must face<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/20\/important-risks-disclosed\/\" target=\"_blank\" rel=\"noreferrer noopener\">SEC asked: important risks disclosed in financial report<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/16\/risks-investors-should-face\/\">What are the risks investors should face up to?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/11\/27\/currency-exchange-risk\/\">Should investors care about currency exchange risk when investing in US stocks?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/01\/07\/return-on-investment\/#:~:text=The%20law%20of%20large%20numbers%2C%20as%20time%20goes,of%20return%20on%20investment%20reverts%20to%20the%20mean.\">The larger the portfolio, the lower the return on investment will possibly be over decads<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/03\/23\/shorting-is-dangerous\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why shorting is extremely dangerous to retail investors?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/08\/21\/no-derivative-products\/\" target=\"_blank\" rel=\"noreferrer noopener\">Never borrow money, shorting, or derivative products<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/09\/10\/wrong-investment-concept\/\" target=\"_blank\" rel=\"noreferrer noopener\">Retail investors&#8217; wrong investment concept not worth trying at all<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em><strong>Disclaimer<\/strong><\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Howard Marks: &#8220;I don&#8217;t think most investors worry about volatility. In fact, I&#8217;ve never heard anyone say, &#8216;The expected return isn&#8217;t high enough to withstand all the volatility.&#8217; They worry about It\u2019s the possibility of permanent capital loss.\u201d<\/p>\n","protected":false},"author":1,"featured_media":32976,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[779,15,383,80,11],"tags":[],"class_list":["post-32948","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-risks","category-charlie-munger","category-howard-marks","category-portfolio-management","category-buffett"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/32948","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=32948"}],"version-history":[{"count":24,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/32948\/revisions"}],"predecessor-version":[{"id":35941,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/32948\/revisions\/35941"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/32976"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=32948"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=32948"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=32948"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}