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"The first rule of an investment is don't lose [money]. And the second rule of an investment is don’t forget the first rule. And that's all the rules there are."
This quote from legendary billionaire investor Warren Buffett has become one of his most well-known aphorisms. It highlights his fundamental investment philosophy with both wit and clarity.
Buffett's investment strategy stands out because of his aversion to losses. Instead of accepting losses, he tends to double down on his positions or even increase his investments when they go against him. He believes that if you like a stock at a certain price, you should like it even more when the price goes down.
Following Buffett’s rules of not losing money in investments can be easier said than done at times. No one wants to experience financial losses. But by taking calculated risks and investing in promising companies, people have the potential to reap significant rewards.
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Even Berkshire Hathaway Inc. was initially a losing bet. Buffett purchased a textile company, thinking it was a bargain.
During a taped interview with CNBC's Becky Quick, Buffett openly discussed his regrettable decision in 1964 to acquire Berkshire Hathaway, a declining textile company based in Massachusetts. Buffett candidly referred to this move as a $200 billion blunder and one of the ‘worst investments he ever made.’
Despite recognizing the unfavorable circumstances early on, Buffett held on for about 20 years, driven by his determination not to give up easily.
Buffett justified the decision to shut down the textile operations by considering the costs involved. The struggling business would have required substantial investment to remain competitive, but the returns would have been weak compared to Berkshire's other growing business lines at the time. Buffett believed that choosing to invest would have led to terrible returns while refusing to invest would make the company noncompetitive.
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In a letter to shareholders in 1985, he referred to the difficult decision as a "miserable choice."
Berkshire Hathaway was transformed from a losing textile business to a diversified holding company worth $755 billion today.
Buffett's focus on longevity is evident in his investment decisions. When evaluating potential investments, he and his partners consider the company's competitive advantage and its ability to sustain that advantage over the long term. They look for businesses they believe will maintain their strength and profitability for five, 10 or 20 years.
Buffett didn’t invent this strategy, but he has certainly mastered it. This strategy has been popular in recent times with the recent market downturn and the growth of investing in private businesses and startups on platforms like StartEngine and Wefunder. The recent bear market saw a number of billion-dollar brands hit new lows on some of the companies like Meta Platforms, Inc. and Netflix Inc. These companies saw declines in excess of 70% before rebounding to near all-time highs. Similarly, the rise of equity crowdfunding platforms like StartEngine allows investors to invest in startups and early-stage growth companies at the earliest stages. These types of investments see investors holding for several years in earlier-stage companies they believe in. Then once they IPO, investors often see substantial gains.
His investment philosophy, often referred to as value investing, has been successfully applied in various instances. For instance, he acquired See's Candies in 1972 and invested over $1 billion in The Coca-Cola Co. stock in 1988, both of which turned out to be lucrative decisions. He holds the stock to this day.
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This article Warren Buffett's No. 1 Investing Rule: Don't Lose Money — Practical Advice For A Billionaire, But Can Regular Investors Apply It Successfully? originally appeared on Benzinga.com
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“Rule number 1: Never lose money. Rule number 2: Never forget rule number 1”
-Warren Buffet-
Of course, this rule cannot be interpreted literally. Warren Buffet’s rule no 1 refers to a prudent investor mindset to be mindful and not careless. An investor should be well informed and not take any chances of losing, and researching before investing is essential to understand what to expect from your investment.
Buffet only invests in the companies he has done thorough and comprehensive research. He doesn’t go into an investment expecting to lose money, and neither should you. The market swing and volatility are inevitable in stock investing. However, as Warren Buffet does, you should stay focused on your goal, even in good or bad times.
Buffett was convinced by Benjamin Graham’s book “The Intelligent Investor”—the British-born American economist, professor, and investor who is also known as the “Father of Value Investing”—that investing in a stock equates to owning a piece of the business. So, Buffett looks for companies with promising long-term prospects when looking for a stock to invest in.
Buffett is a value investor who seeks out high-quality stocks at bargain prices. His true goal is to increase Berkshire Hathaway’s operating power by investing in stocks that will generate consistent profits and capital appreciation over the year.
Share prices fluctuate dramatically throughout the year, sometimes within a week or even a day. However, a company’s revenue and cash flow rarely fluctuate as much. As a result, the share price does not always represent the company’s value. The price of a company’s stock reflects only what people are willing to pay for it at any given time.
Value investors, such as Warren Buffet, seek to profit from this by purchasing shares at significantly lower prices than their estimated intrinsic value. If the company’s value increase, it will be reflected in the stock price eventually, and value investors will make a great return by selling the stock.
Value investing works (over the long term) because it sometimes does not work (in the short term) -Joel Greenblatt
Although value investing sounds simple in theory, it is more demanding in practice. There are two main challenges in value investing. First, calculating a company’s actual intrinsic value can be difficult. Second, purchasing undervalued stocks goes against almost every human instinct, making it difficult to find the right one.
“Never lose money” is Warren Buffet’s rule no 1 and will always be. This advice reminds investors or novice investors who want to invest in stocks to be mindful and research before investing. Although it sounds simple, it is quite complex in practice.
Warren Buffet is an example of a successful value investor. With the strategy of buying companies with good potential at low prices, he can become an influential person in the investment world. In fact, becoming a successful value investor is a long journey.
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