Rules That Warren Buffett Lives By

edward

Rules That Warren Buffett Lives By

By STEPHANIE LOIACONO
Updated Sep 3, 2020


Berkshire Hathaway CEO Warren Buffett isarguably the world's greatest stock investor. He's also a bit of a philosopher.


Buffett pares down his investment ideasinto simple, memorable sound bites. Do you know what his homespun sayingsreally mean? Does his philosophy hold up in all economic environments? Find outbelow.
KEY TAKEAWAYS

• Berkshire     Hathaway CEO Warren Buffett is continuously ranked as one of the richest     people in the world.
• He is seen by     some as being the best stock picker in the world, with his investment     philosophies and guidelines influencing numerous investors.
• One of his     most famous sayings is "Rule No. 1: Never lose money. Rule No. 2:     Never forget rule No. 1."
• Another one     is "If the business does well, the stock eventually follows."
• The third is     "It's far better to buy a wonderful company at a fair price than a     fair company at a wonderful price."

"Rule No. 1: Never lose money. RuleNo. 2: Never forget rule No. 1."
Buffett personally lost about $23 billionin the financialcrisis of 2008, and his company, BerkshireHathaway, lost its revered AAA rating. So how can he tell us to never losemoney?

He's referring to the mindset of a sensibleinvestor. Don't be frivolous. Don't gamble. Don't go into an investment with acavalier attitude that it's OK to lose. Be informed. Do your homework. Buffettinvests only in companies he thoroughly researches and understands. He doesn'tgo into an investment prepared to lose, and neither should you.

Buffett believes the most important qualityfor an investor is temperament, not intellect. A successful investor doesn'tfocus on being with or against the crowd.

The stock market will experience swings.But in good times and bad, Buffett stays focused on his goals, and so shouldall investors. This esteemed investor rarely changes his long-term investingstrategy no matter what the market does.

"If the business does well, the stockeventually follows."
"The Intelligent Investor" byBenjamin Graham convinced Buffett that investing in a stock equates to owning apiece of the business. So when he searches for a stock to invest in,Buffett seeksout businesses that exhibit favorable long-term prospects. Does thecompany have a consistent operating history? Does it have a dominant businessfranchise? Is the business generating high and sustainable profit margins?If the company's share price is trading below expectations for its futuregrowth, then it's a stock Buffett may want to own.

Buffett never buys anything unless he canwrite down his reasons why he'll pay a specific price per share for aparticular company. It is advised that all investors do the same.

"It's far better to buy a wonderfulcompany at a fair price than a fair company at a wonderful price."

Buffett is a value investor wholikes to buy quality stocks at rock-bottom prices. His real goal is to buildmore and more operating power for Berkshire Hathaway by owning stocks that willgenerate solid profits and capitalappreciation for years to come. When the markets reeled during the2007-08 financial crisis, Buffett was stockpiling great long-term investmentsby investing billions in names like General Electric and Goldman Sachs.

To pick stocks well, investors must setdown criteria for uncovering good businesses and stick to their discipline. Youmight, for example, seek companies that offer a durable product or service, andalso have solid operatingearnings and the germ for future profits. You might establish aminimum market capitalization you're willing to accept, and a maximum price-to-earnings(P/E) ratio or debt level. Finding the right company at the rightprice—with a margin for safety against unknown market risk—is the ultimategoal.


Remember, the price you pay for a stockisn't the same as the value you get. Successful investors know the difference.
$83 billion
Berkshire Hathaway CEO Warren Buffett's networth, as of Sept. 2, 2020, making him the sixth richest person in the world.
"Our favorite holding period isforever."

How long should you hold a stock? Buffettsays if you don't feel comfortable owning a stock for 10 years, you shouldn'town it for 10 minutes. Even during the period he called the "FinancialPearl Harbor," Buffett loyally held on to the bulk of his portfolio.

Unless a company has suffered a sea changein prospects, such as impossible labor problems or product obsolescence,a long holding period will keep an investor from acting too human. Being toofearful or too greedy can cause investors to sell stocks at the bottom or buyat the peak and destroy portfolio appreciation for the long run.