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Keep It Simple Like Warren Buffett

Warren Buffett has said that the first rule of investing is to never lose money. The second? To not forget rule number one. Simple enough. What Buffett is saying here harkens back to our previous article, Investing, Speculating, Gambling – What’s The Difference?, in which investing is defined as capital preservation with the chance of appreciation – thanks to Buffett’s mentor, Benjamin Graham. Think about that. Buffett, reflecting his mentor, is saying that above all else – you should be looking for opportunities in which there is zero or little chance of losing your principal. Investing is not rolling the dice and hoping your “investment” appreciates. Investing is more a process of knowing that your principal is safe and that there is a good chance of gains, whether large or small.

Warren Buffett's value investing strategy does well in both bull and bear markets alike.

Echoing Buffett again, investing is not like baseball. In investing, you can stand in the batter’s box all day and watch strike after strike go by – meatballs even – and still be in the batter’s box. There is no 3 strikes and you’re out in investing. Take your time. Wait for the perfect pitch. You can’t strike out! Don’t get caught up in a fleeting trend and neglect doing your research. Wait for your pitch. Understand what you’re investing in and make sure you’re not going to lose your shirt by taking action. Errors of commission are always worse than errors of omission in investing. You can’t lose your principal by erring on the side of caution.

Warren Buffett thinks of stocks just like he thinks of hamburgers. He has remarked that when the price of hamburger goes down, he eats more hamburgers. Makes sense doesn’t it? For some reason, most people do not take this reasoning to stocks. When they go down in price, they freak out and sell into the frenzy. Instead, treat stocks just like hamburgers; buy more when the price of either of them goes down. Remember that price is what you pay and value is what you get. You can overpay for even a great hamburger. You can do the same for a great stock. Buy more stocks and other things when they go on sale!

The last point is to invest in businesses that even an idiot could run because someday – one will. What Buffett is saying here is to favor businesses with superior long-term economics working in their favor. Buffett has had an investment in Coca-Cola for decades now. It would take an absurdly inept manager to put Coca-Cola in the red. Coca-Cola will be selling Coke and its other products for years to come. Dually, people keep drinking Coke through recessions and economic booms alike. When investing for the long-term with goals like retirement and college education in mind, look for businesses with superior economics in the same light as Coca-Cola. You should do fine.

- Andrew Sebastian

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