Warren Buffett's Real Rule Number One of Investing

So Warren Buffett has this famous quote about the two rules of investing: "Rule #1: Never lose money. Rule #2: Never forget Rule #1."

A memorable quote, to be sure, but by itself, it's not particularly helpful or insightful.

It would be nice if there were something else a little more actionable - and fortunately there is.





I've discussed elsewhere why Buffett has been so successful, but in this article I want to share a video clip of Warren Buffett (see below) because he says something that I think is extremely important.

NOTE: This talk originally took place, I believe, in October 1998 with a group of MBA students in Florida.

Now, I have my own three part formula for building wealth, which is basically Ownership + Quality + Price (i.e. valuation).

I go into much more detail in the Leveraged Investing Course itself on this formula, but the quick version is this:

If you take idea of ownership seriously, and make it a priority, and you only own the highest quality businesses you can identify, and you pay as little as possible to own those businesses, you WILL build real wealth.

Incidentally, that's the whole point of the value investing with options mindset - perpetually lowering the cost basis on the high quality companies in your portfolio.

Buffett is obviously a lot smarter than I am, so he's clearly aware of the importance of price. But of those two factors - quality and price - he singles one out as more important than the other.

Check it out for yourself and you'll see what I mean . . .



Warren Buffett on Quality and Price





Warren Buffett's Real Rule Number One

So, based on what he's saying here, Buffett's real Number One Rule for investing success is to own high quality companies, or as he's always called them, "wonderful businesses."

Note These Comments:

1:12 - "If you're right about the business, you'll make a lot of money . . . the timing part of it is a very tricky thing. So I don't worry abut any given event if I've got a wonderful business."

1:52 - "The wonderful business - you can figure out what will happen, you can't figure out when it will happen. You don't want to focus too much on 'when,' you want to focus on 'what.' If you're right about 'what' you don't have to worry about 'when' very much."

Additionally, Buffett says earlier in his talk at 8:56 on this related clip:

"Time is the friend of the wonderful business. It's the enemy of the lousy business. If you're in a lousy business for a long time you're going to get a lousy result, even if you buy it cheap. If you're in a wonderful business for a long time, even if you pay a little too much going in, you're going to get a wonderful result if you stay in a long time."

(I didn't include the video here, because - although it's a very important statement - it's at the very end of a nearly 10 minute clip.)

To me, this is pretty amazing stuff. I've long believed that quality and price (or valuation) are both crucial factors you want to be on your side.

But what Buffett is saying is pretty radical - if you can only have one, you better make sure it's quality.











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