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Rules That Warren Buffett Lives By

34 points by edw519 17y ago

byrneseyeview 17y ago
"Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1." I wish he'd state this more clearly. It's not "Don't invest in anything that fluctuates in price," but "Only invest when you know you're buying something at less than 100 cents on the dollar, and you also know it's going to be worth more than that dollar in the future."
- Retric 17y ago
  What makes or breaks on invester is being willing to sell a stock that went up 30% a year for the last 5 years, and being willing to buy a stock that lost 50% of it's value last year.
  - byrneseyeview 17y ago
    That may have been true in the past, but there's a lot of money invested in data mining past returns to find patterns like that. If stock prices are predictive, who's going to make the better prediction--you, or a team of MIT CS and Physics PhDs with an unlimited budget and years of experience?
    - RyanMcGreal 17y ago
      The problem with the data mining approach is that it works spectacularly until it doesn't, and when it fails, it also fails spectacularly.
      - byrneseyeview 17y ago
        That's true of any strategy in any situation in which your strategy affects the behavior of whatever system you're interacting with. i.e. value investing works, but if everyone does it then people will undervalue intangibles. If everyone chooses to be honest, the first fibber will rule the world. If everyone is violent, the first non-violent group will waste fewer resources. Etc.
        Retric 17y ago
        There is actually a lot of research into this area (game theory). And for a surprising number of situations the best and most stable strategy is somewhat random. EX: Throwing a fastball vs curve ball where the odds of hitting each depend on which was expected. While it's clearly not a stable strategy if everyone did the same thing it's actually fairly hard to consistently beat a basket of randomly chosen stocks. Which is why I think rating stocks based on their relative value for your goals and then randomly picking a basket of them is probably the best and most stable strategy. (Excluding inside information.)
        byrneseyeview 17y ago
        As long as you're smart enough to abstract out of your valuation system, you can survive. Buffett made his early money buying at a discount to assets: the company had a $5 million in the bank and their total market value was $3 million. Those opportunities mostly disappeared in the 1960's--conglomerates bought them out. But Buffett's meta-strategy of buying things at a discount still worked; it just worked better applied to businesses with a sustainable competitive advantage. But if you're not exceptionally good at what you do, yes, some randomness would help. Though wouldn't the closest analogy to the fastball / curveball thing be to randomly alternate among asset-management paradigms, instead? Have some of your portfolio passively indexed, some invested for catastrophe, some in pie-in-the-sky growth, some in inflation-resistant consumer goods, etc.
    - jakarta 17y ago
      tell that to the Goldman Sachs Alpha Fund
    - eru 17y ago
      You may be able to profit from smaller opportunities than they can profitably exploit.
  - lotharbot 17y ago
    To phrase this a little differently: what makes or breaks an investor is being able to separate the actual long-term value of "owning a piece of this company" from the stock's relative motion. Being up 30% or down 50% isn't what matters. Being overvalued or undervalued by the current market is what matters. Don't toss money away on a gamble that something might become worth more in the future (rule 1), but do spend money on good-to-great companies that should be worth more than their current price and should remain stable over the long term (rules 2-4).
- prog 17y ago
  From what I understand based on 'The Intelligent Investor'[1] which Buffett highly recomends, Rule 1 means that any money you lose (say $100), is not just the money lost ($100), it is also the opportunity cost (so you lose > $100) of having turned that money into something greater. So losing money, even a small amount is really really bad. Rule 2 just emphasizes this. IIRC 'The Intelligent Investor' has graphs of various scenarios above. This is just my understanding though, I don't remember it being explicitly stated. The first time I read this I thought, ok, that a sounds cool but does it really mean anything or is it just meant to be catchy, but now I think I get it. Also, I remember reading (I think it was one of his old letters to shareholders[2]), I remember him stating that if there is a year in which a year in which the DOW loses 40% and his portfolio loses 20%, and another year in which the DOW gains 30% and his portfolio gains 30%, he would consider the first to be a better year. [1] http://en.wikipedia.org/wiki/The_Intelligent_Investor http://en.wikipedia.org/wiki/The_Intelligent_Investor [2] http://www.berkshirehathaway.com/letters/letters.html http://www.berkshirehathaway.com/letters/letters.html
nazgulnarsil 17y ago
ugh, this again. Warren Buffet is an outlier. Never model your behavior on outliers. If you want to know how to get rich look at the average rich person (small business owner).
- zts 17y ago
  While I agree with the advice about outliers, I'm not sure I'd describe the average small business owner as rich... Is your personal experience simply different to mine?
  - nazgulnarsil 17y ago
    goes the other way. most rich people are small business owners even if most small business owners aren't rich. also depends on what level of liquid vs total net worth we're talking.
- byrneseyeview 17y ago
  Buffett's advice is surprisingly applicable. His fundamental views haven't changed all that much over time. And although a lot of his success has come from being a better estimator of odds, or having more information, a decent fraction comes from his attitude towards the odds, and his tendency to acquire information. That's worth emulating.
- padmanabhan01 17y ago
  The problem is that so little is actually written about the average business owner.
- netcan 17y ago
  Interestingly, Buffet's style is more applicable to an average rich person's (oxymoron?) position then is the investing type of most other uber-investors: Buy or buy stock in companies you want to own. I see what you are saying and you are right. But this doesn't have to be an argument from authority (he made it, so he knows what he's saying). It can just be about the strength of his ideas regardless of where they come from.
- 17y ago

34 points by edw519 17y ago

"Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1." I wish he'd state this more clearly. It's not "Don't invest in anything that fluctuates in price," but "Only invest when you know you're buying something at less than 100 cents on the dollar, and you also know it's going to be worth more than that dollar in the future."

Retric 17y ago
What makes or breaks on invester is being willing to sell a stock that went up 30% a year for the last 5 years, and being willing to buy a stock that lost 50% of it's value last year.
- byrneseyeview 17y ago
  That may have been true in the past, but there's a lot of money invested in data mining past returns to find patterns like that. If stock prices are predictive, who's going to make the better prediction--you, or a team of MIT CS and Physics PhDs with an unlimited budget and years of experience?
  - RyanMcGreal 17y ago
    The problem with the data mining approach is that it works spectacularly until it doesn't, and when it fails, it also fails spectacularly.
    - byrneseyeview 17y ago
      That's true of any strategy in any situation in which your strategy affects the behavior of whatever system you're interacting with. i.e. value investing works, but if everyone does it then people will undervalue intangibles. If everyone chooses to be honest, the first fibber will rule the world. If everyone is violent, the first non-violent group will waste fewer resources. Etc.
      - Retric 17y ago
        There is actually a lot of research into this area (game theory). And for a surprising number of situations the best and most stable strategy is somewhat random. EX: Throwing a fastball vs curve ball where the odds of hitting each depend on which was expected. While it's clearly not a stable strategy if everyone did the same thing it's actually fairly hard to consistently beat a basket of randomly chosen stocks. Which is why I think rating stocks based on their relative value for your goals and then randomly picking a basket of them is probably the best and most stable strategy. (Excluding inside information.)
        byrneseyeview 17y ago
        As long as you're smart enough to abstract out of your valuation system, you can survive. Buffett made his early money buying at a discount to assets: the company had a $5 million in the bank and their total market value was $3 million. Those opportunities mostly disappeared in the 1960's--conglomerates bought them out. But Buffett's meta-strategy of buying things at a discount still worked; it just worked better applied to businesses with a sustainable competitive advantage. But if you're not exceptionally good at what you do, yes, some randomness would help. Though wouldn't the closest analogy to the fastball / curveball thing be to randomly alternate among asset-management paradigms, instead? Have some of your portfolio passively indexed, some invested for catastrophe, some in pie-in-the-sky growth, some in inflation-resistant consumer goods, etc.
  - jakarta 17y ago
    tell that to the Goldman Sachs Alpha Fund
  - eru 17y ago
    You may be able to profit from smaller opportunities than they can profitably exploit.
- lotharbot 17y ago
  To phrase this a little differently: what makes or breaks an investor is being able to separate the actual long-term value of "owning a piece of this company" from the stock's relative motion. Being up 30% or down 50% isn't what matters. Being overvalued or undervalued by the current market is what matters. Don't toss money away on a gamble that something might become worth more in the future (rule 1), but do spend money on good-to-great companies that should be worth more than their current price and should remain stable over the long term (rules 2-4).
prog 17y ago
From what I understand based on 'The Intelligent Investor'[1] which Buffett highly recomends, Rule 1 means that any money you lose (say $100), is not just the money lost ($100), it is also the opportunity cost (so you lose > $100) of having turned that money into something greater. So losing money, even a small amount is really really bad. Rule 2 just emphasizes this. IIRC 'The Intelligent Investor' has graphs of various scenarios above. This is just my understanding though, I don't remember it being explicitly stated. The first time I read this I thought, ok, that a sounds cool but does it really mean anything or is it just meant to be catchy, but now I think I get it. Also, I remember reading (I think it was one of his old letters to shareholders[2]), I remember him stating that if there is a year in which a year in which the DOW loses 40% and his portfolio loses 20%, and another year in which the DOW gains 30% and his portfolio gains 30%, he would consider the first to be a better year. [1] http://en.wikipedia.org/wiki/The_Intelligent_Investor http://en.wikipedia.org/wiki/The_Intelligent_Investor [2] http://www.berkshirehathaway.com/letters/letters.html http://www.berkshirehathaway.com/letters/letters.html

nazgulnarsil 17y ago

ugh, this again. Warren Buffet is an outlier. Never model your behavior on outliers. If you want to know how to get rich look at the average rich person (small business owner).

zts 17y ago
While I agree with the advice about outliers, I'm not sure I'd describe the average small business owner as rich... Is your personal experience simply different to mine?
- nazgulnarsil 17y ago
  goes the other way. most rich people are small business owners even if most small business owners aren't rich. also depends on what level of liquid vs total net worth we're talking.
byrneseyeview 17y ago
Buffett's advice is surprisingly applicable. His fundamental views haven't changed all that much over time. And although a lot of his success has come from being a better estimator of odds, or having more information, a decent fraction comes from his attitude towards the odds, and his tendency to acquire information. That's worth emulating.
padmanabhan01 17y ago
The problem is that so little is actually written about the average business owner.
netcan 17y ago
Interestingly, Buffet's style is more applicable to an average rich person's (oxymoron?) position then is the investing type of most other uber-investors: Buy or buy stock in companies you want to own. I see what you are saying and you are right. But this doesn't have to be an argument from authority (he made it, so he knows what he's saying). It can just be about the strength of his ideas regardless of where they come from.
17y ago