This article is about 3 minutes read time.
Warren Buffet is arguably the best stock market investor of all time. If you’d invested $500 with the guru in 1965, by the end of December last year that stake would have grown to roughly $22m.
What is Buffetts favorite rule in investing? Read on and I’ll tell you.
A simple rule
Since Buffett is one of the most successful stock pickers in history, you could be forgiven for thinking that his most important rule about investing would be really complex. But it isn’t.
He says: “The first rule of investment is don’t lose“. It’s that simple
Rule number one: never lose money. Rule number two: Never forget rule number one.
Warren Buffett
We should respect risk management, that is the key to success
Now you might think that is a little odd No person emerges unscathed from an investment loss.
Some of the stocks that Buffett is buying now are also some of those sinking names, in which Buffett has famously lost quite a lot of money. He made hundreds of millions of losses, such as his disastrous bet on Tesco shares.
I know what I am saying. And that’s risk management…It is huge if you want to successful investor.
The importance of avoiding large losses, if you hope to achieve high returns over the long-term. Because you see, if a stock is down 50%, then it has to go up 100% just to get back to even. If it drops by 80%, you must double your money to recover!
Following Buffett’s rule
There are a few particular strategies out there that can assist investors in adhering to Buffett’s rule
The first is to spread money across multiple stocks. You can’t win them all when it comes to choosing stocks. However, by diversifying our investments and purchasing 20 or more stocks for our portfolios, we greatly increase the likelihood of us eventually succeeding in the stock market. While some stocks may stink, on an overall basis, the basket of stocks will do well over the long term.
Another… is focusing on what you are paying for a security. This is not necessarily going to be low per-share stocks (as Buffett is famous for having said he would rather buy great businesses for average prices than average businesses for cheap). But it does involve the targeting of stocks that are not selling at obscene valuations and will probably NOT be down 80% in the future.
A stock to look at now?
A UK stock that appears to be attractive on this front right now is Coca-Cola HBC (LSE: CCH). A huge Coca-Cola bottling partner to the Coca-Cola Company (another one of Buffets big 3)!
Currently, that shares are trading on a forward price-to-earnings (P/E) ratio of 13.1 based on next year’s earnings expectations. I’m sorry, I think that valuation is a little absurd.
This is a business that can grow for decades to come while also possessing defensive qualities. Also — the company has a great dividend growth history (double digit increases for more than 10 years!
This stock certainly does come with risk. One, Changing consumer tastes/preferences (ie the move towards less sugary beverages) There you have it – another would be economic and geopolitical related turbulence, (some consumers actually are boycotting US brands right now)
However, from the perspective of today’s valuation I find great deal of merit in this stock. I think it is to be considered as an aggregate parameter for having a diversified portfolio.
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