How to avoid portfolio bombs

The allure of finding a big winner is difficult to resist for most equity investors. After all, we’re doing it to make money! However, there’s just as much (if not more) benefit from avoiding losers as there is from picking winners. Or as Warren Buffett has famously put it: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” Simple maths supports this hypothesis too – a 50% loss requires a 100% gain just to get back to breakeven. This is especially true in the world of small caps, where Katie Hudson from Yarra Capital operates. “When they go wrong in small companies, they go wrong in a big way. It’s not uncommon to see a 50% reduction in the share price on the back of a company having a misstep.” In this episode of The Rules of Investing podcast, Katie share some strategies for avoiding portfolio bombs. She also tells us how she exploits inefficiencies in the markets to produce outsized returns, and shares an Aussie small cap that markets are underestimating.