In my younger years I took advantage of a great opportunity to meet the Oracle of Omaha, Warren Buffett himself.
It was my senior year of undergraduate school. I was a member in our school of business’s investing club. I joined the club because the professor that headed it up was one of my favorite finance professors. He was also an expert on Warren Buffett’s investing style, as well as an expert on Benjamin Graham (Warren Buffett’s mentor).
Our club had an opportunity to fly out to Omaha and meet Warren, as well as tour some of the places in Omaha while there. Our highlight of the trip was hearing Buffett speak in his office’s conference room. Very exciting stuff to get to meet one of the richest men in the world.
But in spite of all of his riches he was a very down to earth man. (This was in stark contrast to people we met on another trip our investing club took to Wall Street in the heart of New York City.) Buffett still lives rather modestly. And if anyone could live extravagantly it would be him.
Warren Buffett’s 2 Rules Of Investing
Warren Buffett has obviously been one of the world’s most successful investors. His net worth is upwards of $70 billion. That’s Billion with a “B.” So when he gives investing advice I listen. So let’s get started with his 2 rules of investing.
Rule #1: Never Lose Money
True to his nature of giving out homespun wisdom that is a bit tongue in cheek, Buffett advises that when you are investing try to not lose money.
Obviously he’s being a bit facetious here. Because even Warren Buffett has down years. Every investor will have a down year. That should be expected. And if you can understand that fact it will help you to not get too jittery when your portfolio is down for the year.
But overall, the advice to “Never Lose Money” is correct. While everyone will experience a down year (even Buffett) it is wise to have measures in place to limit your losses in those years. As a rule you should try to buy things that don’t lose money.
And when your portfolio has experienced losses, you need to be in a position where you don’t have to sell at a loss. Two good measures to put in place in your retirement planning to help you avoid selling at a loss include:
- Having enough cash reserves on hand that you can withdraw from if necessary.
- Having enough income coming in to cover expenses so you won’t have to sell stocks, bonds, or mutual funds to cover expenses.
Those 2 rules can help you to not lose money when investing.
How The Math Works
It also makes mathematical sense to “Not Lose Money” when investing. Here is a chart that shows how much your portfolio must grow just to break even after taking a loss.
What this chart means is that if your portfolio dropped 10%, you would have to grow it by 11% just to break even. If your portfolio drops 50% you would have to grow it by 100% just to break even. Seems pretty incredible, right?
Well, let’s take a $100,000 portfolio. If it drops by 50% it would be worth $50,000. To get back to break even you would have to grow that $50,000 portfolio by 100% just to get back up to $100,000.
That’s why it is so important to have measures in place to help you not lose money when investing.
Consider what happened to people invested in the S&P 500 during 2008 and 2009. On January 11, 2008 the S&P 500 stood at 1,401. By March 6, 2009 it had dropped to 683. That’s a decrease of 51%.
It took until March 30, 2012 until the S&P 500 reached 1,408. That is roughly break even from where it stood it 2008. So from March of 2009 to March of 2012 the S&P 500 increased by about 100%. But all it did was bring its investors back up to break even.
So what is Buffett’s second rule of investing?
Rule #2: Never Forget Rule #1
That pretty much sums up how important Buffett thinks it is to not lose money.
Need Help Implementing Buffett’s 2 Rules Of Investing In Your Portfolio?
Investing can be intimidating, especially if you are a retiree who is very dependent on making your nest egg last throughout retirement. If you have investing questions about your own portfolio that you’d like help answering, then you can send me an email to [email protected].
And if you’d like to talk to me on the phone about your investing questions you can easily claim a spot on my calendar by CLICKING HERE.
Maybe you have a financial advisor that is recommending a specific investment to you and you’re not sure if it is right for you. You can ask me and I’ll help you with the decision. Or maybe you have some investments you are considering (or an advisor is recommending) that you sell to purchase something like an annuity. And you’re not sure if it is the best thing for you to do. You can ask me your questions and I’ll help point you in the right direction.