Anyone with even a mild interest in managing their own finances will probably have heard of Warren Buffett. He’s the richest general investor of all time and likes to pass on his wisdom in crafted sound bites delivered in an avuncular style.
Articles and stories repeating his aphorisms pepper the internet. And the ongoing output of Buffett-themed material keeps on coming.
For example, who doesn’t know by now that Warren Buffett likes to pay a fair price for a wonderful business? Or that he goes shopping for shares when economic clouds are in the sky? Surely many of us chant in our sleep that price is what you pay, but value is what you get. And we mutter to ourselves that we pay a full price for a cheery consensus.
Buffett fatigue
However, there’s danger in becoming over-familiar with Buffett’s utterings. Repeating things too often just normalises them and minimises their impact. I’m guilty myself of letting Buffett’s sayings wash over me without really thinking about them anymore.
And one of the problems is when Buffett speaks, it all seems so casual and, well, obvious. But decades of successful experience with investing back the deceptive simplicity of his advice. And he’s distilled his statements into easy-to-understand nuggets. I reckon he thinks before he speaks – he thinks a lot. Indeed, thinking is the main thing he’s done with his entire life.
But we’re not listening — not properly. Because if we were, most private and institutional investors wouldn’t be under-performing the general stock market. And there’s a load of research out there demonstrating that most of us are doing poorly with our investment strategies and tactics.
There’s one tip in particular from Buffett I reckon is neglected and could really make me rich. I think many people have overlooked it because it’s non-specific. But it’s probably one of the main drivers separating poor-performing investors from out-performing investors. The tip is Buffett’s famous rule number one – never lose money.
Risk-first investing
Sounds so obvious, right? But no investor sets out to lose money. We always think our stock picks will make money – that’s why we pick them. But many of us do lose money. For example, we allow losing investments to run. Why do we do that? Buffett himself recently cut his losers when he sold his airline stocks. And a few years back he ditched his investment in Tesco, holding his hands in the air and admitting he made a mistake.
And we sometimes execute our portfolios like the grand old Duke of York – marching our stocks to the top of the hill and then marching them down again. But holding on for too long can cause a loss of gains. And that’s losing money.
I think Mark Minervini addresses Buffett’s advice best. He says we should approach every investment risk-first. Instead of asking, how much could we gain on an investment, we should think about how much we could lose. And we should have a plan for dealing with the situation if it begins to develop.