Warren Buffett’s rules for investing
Warren Buffett has amusingly spelled out his two rules for investing many times in the past:
Rule #1: Don’t lose money
Rule #2: Don’t forget Rule #1
This may seem like a gross oversimplification, but it holds a kernel of truth I believe few grasp.
Those who’ve made a lot of money investing–whether in real estate, equities, bonds, commodities, whatever–have almost always done so because they didn’t lose very often, and when they did it was with small bets.
In my opinion, this stands in stark contrast with the belief that most people hold: that people who make a lot of money investing do it by gambling big and hitting the jackpot. They tend to think that great investors bet the farm on a wild toss of the coin and make out like bandits.
I’m certain some people have gotten rich that way, but they are a very small minority. The vast majority have done it by not losing their shirts on bad gambles.
Not losing money isn’t very sexy. It’s not like buying Cisco and watching it go up by 10 times. It’s the hard work of picking things you’re pretty certain will go up and almost 100% certain will not go down.
Instead of trying to catch shooting stars, not losing means finding a few things that, after a whole lot of research and study, look like they will provide good upside and have an extremely low likelihood of going down much, if at all over the long run.
Why is it that trying to catch shooting stars doesn’t work and not losing does? Because most attempts to catch a shooting star ends with a large if not total loss. Even if you manage to catch a shooting star once, the next time you play you are more likely to lose than win. Over time, this just doesn’t work.
Not losing slowly builds over time into a growing some of money. It doesn’t happen fast. It doesn’t look very sexy. But it works. If you aren’t losing, you just keep building up and up.
That’s what Mr. Buffett is trying to tell you.
Don’t swing from your heels at a wild pitch and hope you connect and knock it out of the park. Instead, wait for a pitch you are almost positive you can hit, and then get a base hit that allows you to move forward in the game. Over time, this will build into a win.
Swinging for the fences will provide a couple of exciting moments, but will lead to loss after loss over time. And, that’s not how to successfully invest.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.