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Today, we'll revisit some of Warren Buffett’s most timeless principles.

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The Buffett Rules: Revisiting Timeless Principles

Berkshire Hathaway CEO Warren Buffett, widely seen as the greatest stock picker, has core investment philosophies worth revisiting over and over. Here are some of his principles, illustrated with specific examples and quotes.

Never Lose Money

Perhaps Buffett's most famous principle: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."

Buffett doesn’t mean this literally — he’d be the first to say he’s made plenty of mistakes, losing billions of dollars over the decades. But the principle underscores Buffett's focus on capital preservation and risk management. To Buffett, it’s about endurance and staying in the game, which requires capital. 

Buffett's cautious approach during the dot-com bubble of the late 1990s exemplifies the principle. While many investors were chasing high-flying tech stocks, Buffett avoided the sector, protecting Berkshire Hathaway from major losses when the bubble burst.

Buy Businesses, Not Stocks

Buffett focuses on the value of the business as a whole rather than just the stock. He sees companies as what they are: companies, not merely tickers. He focuses on the underlying business rather than short-term stock price movements. He wrote in his 2019 annual letter: "I view the stocks we partially own through Berkshire Hathaway as interests in businesses, not as ticker symbols to be bought or sold based on their 'chart' patterns, the 'target' prices of analysts or the opinions of media pundits. 

“Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back."

The approach helped Berkshire invest in companies like Coca-Cola, Apple, and American Express, which Buffett sees as having strong, enduring business models.

Focus on the Long Term

Buffett is famous for his long-term perspective. He stated: "Our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint."

This philosophy is evident in Berkshire's long-term holdings in companies like GEICO and See's Candies, which have been part of his portfolio for decades. 

Buffett also quoted lines from the Rudyard Kipling poem, “IF,” to illustrate the investment opportunities available to those with limited amounts of debt. "When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That's the time to heed these lines from Kipling's If: 'If you can keep your head when all about you are losing theirs ... If you can wait and not be tired by waiting... If you can think – and not make thoughts your aim... If you can trust yourself when all men doubt you... Yours is the Earth and everything that's in it.'"

Margin of Safety

The difference between a company's fair value and its market value is a margin of safety. The larger the margin of safety, the safer the investment. Buffett consistently mentions the value of buying at a price below intrinsic value: "The three most important words in investing are 'margin of safety.'"

Notably, this principle guided Berkshire's acquisition of BNSF Railway in 2009, when the company was undervalued amid the financial crisis.

Avoid Overtrading with the Punch Card Approach

Buffett warns against excessive trading. He wrote in his 2005 letter:

“Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

Look no further than Berkshire's low portfolio turnover rate.

Plus, Buffett advocates for selective, high-conviction investing with his famous “punch card” approach. 

"I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches - representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

For Buffett, a wonderful portfolio has concentrated, high-conviction investments. 

Understand What You’re Investing In

Buffett says it’s key to understand what you're investing in: Make sure you understand the business you're investing in. Buffett stresses why we should invest within our circle of competence: "Risk comes from not knowing what you're doing," he said in 1993. 

This principle led Buffett to avoid technology stocks for many years, as he didn't understand the sector well enough. It has also helped him stay the course and not panic sell his holdings when they falter. 

Ignore Market Trends and Forecasts

Refrain from basing your decisions on what everyone else is doing. In other words, Buffett is skeptical of market predictions.

Benjamin Graham once said, "If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market."

Buffett has added: "We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children."

Instead, he focuses on fundamental business analysis — as demonstrated by Berkshire's investments during market downturns, when blood is on the streets. For Buffett, that’s what the big money starts to get made.

Dive deeper

Read more about Buffett’s philosophy via his annual shareholder letters or listen to a compiled list of podcast episodes about the billionaire investor, all from the We Study Billionaires show.

See you next time!

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