Chapter 1 mentioned the importance of compounding in earnings returns. That implies taking the stance of the defensive investor to avoid big drawdowns. Once value is lost, it’s hard for compounding to dig you out of the hole. It’s the upside that compounds. That’s what a value investor looks for with a margin of safety.
There are Exchange Traded Funds (ETFs) now being offered that take away some of the downside but cap the upside. These funds are called buffer funds or defined-outcome, defined-protection, target-outcome, or structured-protection funds. They typically employ options to limit the downside. The funds can be helpful to an investor seeking downside protection while sharing in some of the upside in holding stocks.
But, beware: Reducing the downside is good, but by capping the upside, the investor is forfeiting upside compounding, much of which comes from stock market rallies.