Buffet’s Two Rules of Investing That Made Him a Billionaire
Everything you really need to know about investing.
Warren Buffett bought his first stock at 11. Now he is worth 97.6 billion. It’s fair to say that Buffett knows quite a bit about investing.
Buffett believes there are two rules to investing.
Rule #1. Don’t Lose
Rule #2. Don’t Forget The First Rule
Why?
It’s a little frustrating, right? Those rules are annoyingly simple. But it really is that simple to Warren. The important question to ask is, why? Why shouldn’t I lose money?
I bet you think you know the answer — but you probably don’t. The question is so obvious that no one tries to answer it. Because, well… what’s the point?
We “know” why we shouldn’t lose money. If you want to have money then you shouldn’t lose it. Right? But it’s deeper than that…
A little bit of maths shows why losing money is something to be avoided at all costs, excuse the pun. If you have £1000 and lose £500 then you’ve lost 50% of your money. Now you have £500, what will it take to get back to £1000? 100% of your money.
Simply put… It’s easier to fall down the ladder than to climb back up. 50% down equals 100% up. This is why you shouldn’t lose money. Because it’s twice as hard to get back to where you were — this is time you could have been growing.
When you lose money you don’t just lose that money but you also lose any potential earnings you could have made from that capital. This is why losing money massively affects your exponential factor within investing.
How to Not Lose Money
Warren Buffet’s whole investing strategy is designed to be simple. And he prides himself on that. He’s stated multiple times that you don’t need a high IQ to do what he does. You just need to understand a couple of basic principles.
These are the principles that Buffett alludes to when he says ‘Don’t lose.’
Don’t Gamble
You lose money when you don’t know what you’re doing. Or you buy something you don’t understand. Buffett knows what he owns, therefore he is not gambling. He can make a valid assessment of a company and its longevity so he can trust that the stock will rise over time.
If you don’t do this then you are gambling. You will lose money.
Don’t Sell
Buffett believes to be an investor you need to have a good temperament — you need to be able to see your value drop over 50% without panicking.
Stocks declining only gives a potential loss. It only becomes an actual loss when you sell at a price that is lower than when you bought it. You only lose money when you sell. If you don’t want to lose money, don’t sell.
You might think that this would overly simple. That’s exactly the point. Buffet’s investing is simple: don’t lose money. If you don’t lose money then you can quickly grow your pot.
When you don’t lose money then you don’t have to waste resources climbing back up the ladder, you can instead keep striving to uncharted territories.
To assist in the effort of not losing money Buffett continues to keep things simple with a couple of principles; don’t gamble and don't sell.
