Longtime Berkshire Hathaway CEO Warren Buffett is inarguably the world’s greatest stock investor. He’s also a bit of a philosopher and Buffett pares down his investment ideas into simple, memorable sound bites. Here are a few of his most famous rules of investing.
Rule 1: Never Lose Money
This might seem like a no-brainer because what investor sets out with the intention of losing their hard-earned cash? But, in fact, events can transpire that can cause an investor to forget this rule. Buffett thereby swears by Rule 2.
Rule 2: Never Forget Rule No. 1
Buffett personally lost about $25 billion in the financial crisis of 2008 and his company, Berkshire Hathaway, lost its revered AAA rating.12 So how can he tell us to never lose money?
He’s referring to the mindset of a sensible hyundaisemarang investor: Don’t be frivolous. Don’t gamble. Don’t go into an investment with a cavalier attitude that it’s OK to lose. Be informed. Do your homework.
Warren Buffett invests only in companies that he thoroughly researches and understands. He doesn’t go into an investment prepared to lose and neither should you. He believes that the most important quality for an investor is temperament, not intellect. A successful investor doesn’t focus on being with or against the crowd.
Rule 3: Pick Businesses, Not Stocks
When a business does well, the stock should eventually follow. Buffett seeks out businesses that exhibit favorable long-term prospects when he’s choosing investments. Does the company have a consistent operating history? Does it have a dominant business franchise? Is the business generating high and sustainable profit margins? It’s a stock that Buffett might want to own if the company’s share price is trading below expectations for its future growth.
Rule 4: A Wonderful Company at a Fair Price vs. a Fair Company at a Wonderful Price
Buffett is a value investor who likes to buy quality stocks at reasonable if not rock bottom prices. His goal is to build a portfolio of stocks that will reward him with solid profits and capital appreciation for years to come. When the markets reeled during the 2007-2009 financial crisis, Buffett used the opportunity to stockpile venerable long-term investments by spending billions on names like General Electric and Goldman Sachs.45
Rule 5: Our Favorite Holding Period Is Forever
Warren Buffet is the ultimate exponent of a buy-and-hold philosophy. How long should you hold a stock? Buffett says you shouldn’t own it for 10 minutes if you don’t feel comfortable owning it for 10 years. He held on to the bulk of his portfolio even during the financial crisis, which he referred to as an “economic Pearl Harbor.”7
Committing to a long holding period will keep an investor from acting too human unless a company has suffered a sea change in prospects, such as impossible labor problems or product obsolescence. Being overly fearful or greedy can cause investors to sell stocks at the bottom or buy at the peak and destroy portfolio appreciation in the long run.3