Buffett's Rules
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By Matthew Gutierrez and Shawn O'Malley · October 20, 2024
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Today, we'll revisit some of Warren Buffett’s most timeless principles.
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The Buffett Rules: Revisiting Timeless Principles
Berkshire Hathaway CEO Warren Buffett, widely seen as the greatest stock picker, has core investment philosophies worth revisiting over and over. Here are some of his principles, illustrated with specific examples and quotes.
Never Lose Money
Perhaps Buffett's most famous principle: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."
Buffett doesn’t mean this literally — he’d be the first to say he’s made plenty of mistakes, losing billions of dollars over the decades. But the principle underscores Buffett's focus on capital preservation and risk management. To Buffett, it’s about endurance and staying in the game, which requires capital.?
Buffett's cautious approach during the dot-com bubble of the late 1990s exemplifies the principle. While many investors were chasing high-flying tech stocks, Buffett avoided the sector, protecting Berkshire Hathaway from major losses when the bubble burst.
Buy Businesses, Not Stocks
Buffett focuses on the value of the business as a whole rather than just the stock. He sees companies as what they are: companies, not merely tickers. He focuses on the underlying business rather than short-term stock price movements. He wrote in his 2019 annual letter: "I view the stocks we partially own through Berkshire Hathaway as interests in businesses, not as ticker symbols to be bought or sold based on their 'chart' patterns, the 'target' prices of analysts or the opinions of media pundits.?
“Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back."
The approach helped Berkshire invest in companies like Coca-Cola, Apple, and American Express, which Buffett sees as having strong, enduring business models.
Focus on the Long Term
Buffett is famous for his long-term perspective. He stated: "Our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint."
This philosophy is evident in...