Warren Buffett, one of the world’s most successful investors, has shared plenty of advice over his long career. But one piece of advice stands out as his top rule: “The first rule of investment is don’t lose money.” And if you ask about the second rule? “Don’t forget the first.” According to Buffett, that’s all you need to know.
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It might sound simple — even a bit obvious. After all, who wants to lose money? But Buffett's point is more profound than it might first appear. His investment philosophy is about protecting what you already have. If you lose a big chunk of your investment, you need a huge return just to get back to where you started.
For example, when a stock drops by a big margin, it requires an even greater gain just to get back to its original value. It's much easier to prevent these kinds of losses in the first place than to claw your way back from them.
Of course, saying “don't lose money” is easier than actually following through, especially with the ups and downs of the stock market. But there are practical strategies investors can use to help follow Buffett’s rule.
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You lower the chance of suffering a significant loss on any one investment by distributing your funds over several stocks or sectors. Your portfolio can still be balanced even if one or two stocks do not perform well.
Buffett is known for investing in businesses with strong fundamentals that he believes will be successful for many years to come. He prefers companies with a competitive edge, solid management, and products people will continue to buy. Instead of chasing the cheapest stocks, he looks for good companies at reasonable prices.
The market can be a rollercoaster, and emotions like fear or greed often cause people to make costly mistakes. Buffett's approach is to stay calm when others are panicking and to make decisions based on logic, not emotion.
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It's worth noting that even Warren Buffett has lost money, and he has been open about what he thinks are his biggest investment mistakes. He has also stated that one of his worst missteps was purchasing Berkshire Hathaway, a textile company that was initially in decline. Nevertheless, Buffett has been successful over the long term despite these setbacks because he is focused on limiting losses and learning from his mistakes.
Alternative Opinions
On the other hand, some investors think that taking measured risks, even at the expense of occasional losses, is a necessary component of attaining sizable returns, even if Buffett’s advice to avoid losses is generally accepted. Mark Cuban, for example, once said, “Diversification, that’s for idiots” and that “buy and hold is a crock of s***.”
Plus, startups, emerging technologies, and high-growth companies often come with higher risk but also the potential for substantial gains — something that Buffett's cautious approach might miss.
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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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