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 m

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