Jeannine Mancini
·4 min read
"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 circ*mstances 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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As an enthusiast deeply entrenched in the world of investments and finance, my expertise extends across the realms of investment strategies, market dynamics, and the principles that guide successful investors. The article you provided, featuring Warren Buffett's renowned investing philosophy, resonates with my comprehensive understanding of the subject matter.
Warren Buffett, often hailed as one of the most successful investors in history, has distilled his approach into two fundamental rules: "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." This encapsulates his commitment to preserving capital, a principle that has been a cornerstone of his investment strategy.
Buffett's emphasis on avoiding losses is not just a rhetorical flourish; it's a philosophy that he has applied consistently throughout his career. The article illustrates his distinctive approach of doubling down on investments rather than succumbing to losses. This contrarian perspective—that if you believe in a stock at a certain price, you should like it even more when the price goes down—exemplifies his resilience and conviction in the face of market fluctuations.
The narrative delves into a significant example from Buffett's own experiences—the acquisition of Berkshire Hathaway, initially a losing bet. Despite acknowledging it as a $200 billion blunder, Buffett's determination and focus on the long term led him to transform the failing textile business into the diversified holding company that is worth $755 billion today. This anecdote provides a tangible case study of how Buffett's commitment to avoiding losses played out in a real-world scenario.
Moreover, the article touches upon Buffett's investment philosophy, often termed as value investing. This strategy, characterized by identifying undervalued stocks with long-term potential, has been successfully applied in Buffett's acquisitions of companies like See's Candies and substantial investments in The Coca-Cola Co. stock.
The discussion extends beyond Buffett's individual experiences to connect with broader trends in the investment landscape. It acknowledges the recent changes in federal law that opened up opportunities for retail investors to engage in high-growth startups. The article also explores the rise of equity crowdfunding platforms like StartEngine, aligning with the current market trends and showcasing how investors are adapting to new avenues.
In essence, this article encapsulates not only the timeless wisdom of Warren Buffett's investment rules but also their practical applicability in the ever-evolving landscape of finance. It serves as a testament to the enduring relevance of principles such as avoiding losses, taking calculated risks, and embracing a long-term perspective—a narrative that resonates deeply with my own wealth of knowledge in the field of investments.
