ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Warren Buffet's Three Golden Rules of Investing

Updated on May 30, 2017

Warren Buffet has consistently hogged a place in top three of Forbe's list of billionaires for nearly two decades. Considered the most successful investor in history, he has consistently given his investment firm, Berkshire Hathaway, an annual return of over 22 percent for over forty years. In so doing, he has not only made himself rich, he had made many people who invested in his firm rich beyond their dreams. What is the secret of his success?

Here are his three golden rules of investing:

Rule No. 1: "Do not lose your money"

The first rule of investing, according to the legendary investor, is not to lose money. "How is that possible?" you may ask. Every investment has inherent risks associated with it. Regardless of how good you are, you can't avoid making losses. That's not entirely true, according to Mr. Buffet. He says that if you plan your investment portfolio well, you will not lose your money no matter what happens to individual investments.

Buffet's advice: Hold on to the winners for the long run and cut your losses while they are still small. This is exactly what most investors fail to do. Let's say out of every ten investments you have made, four turn out to be winners each giving you a return of 50 percent. You will make a total gain of 200 percent, but only if you let the winner run their course and cut the losers before they turn into huge losses.

Rule No. 2: "Do not analyze stocks, analyze business"

Once a reporter asked Buffet for tips on analyzing stocks. He promptly replied, "I do not analyze stocks, I analyze business." This is the secret of his success. While the majority of investors analyze stocks, he analyzes business, because business drives stocks and not the other way round. According to Mr. Buffet, every stock is a business in operation and the long-term value of the stock is determined by the performance of the business.

In the 1980s, Japan Airlines was one of the biggest airlines in the world and its stocks were soaring high. A lot of investors looked the JAL stocks and put their money in it hoping to make a killing. But Buffet knew better. He knew that the airline was overextended and its operating costs were becoming untenable. When global airfares fell in the 1990s, the airline came crashing down. The investors who had put money in its stocks lost a lot of money.

Rule No. 3: "Be greedy when others are fearful; be fearful when others are greedy"

Greed is integral to human nature. But greed is not always bad. If used positively and at the right time, it can make you very, very rich. The trouble is most investors become greedy at the wrong time. They buy stocks just when they are rising rapidly, hoping to make a huge profit in a very short time. But when the market takes a reverse turn, they panic and end up losing a lot of money.

Buffet advocates the contrarian approach. When the market is rapidly rising is not the right time to become greedy. The right time to be greedy is when the market goes for a deep correction, according to him. When the global stock markets went down in 2008 after the collapse of Lehman Brothers, most investors panicked and pulled their money out as fast as they could. Buffet, on the other hand, bought Goldman Sachs and other stocks worth $5 billion and made a several billion more when the market recovered.

If you liked this article, please visit my blog How To Do Forex. I have been trading Forex for the last 7 years and I know a thing or two about how the market works.

Comments

    0 of 8192 characters used
    Post Comment

    • Johan Smulders profile image

      Johan Smulders 

      3 years ago from East London, South Africa

      He should know so good advice!

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)