Warren Buffett Speaks

I'm asked all the time about making money in the stock market. Well, I'm no expert... I'm still working on it. But plenty of people are and Warren Buffett is one of them. He is arguably the world's greatest stock investor and a bit of a philosopher. He pares down his investment ideas into simple, memorable sound bites. So lets look at them, shall we?

Rule No. 1: Never Lose Money.
Rule No. 2: Never Forget Rule No. 1.

Buffett lost about $23 billion in the financial crisis of 2008. So how can he tell us to never lose money?

Its the mindset of a sensible investor. Don't be frivolous. Don't gamble. Don't go into an investment with a cavalier attitude that it's OK to lose. Be informed. Do your homework. Buffett invests only in companies he thoroughly researches and understands. He doesn't go into an investment prepared to lose, and neither should you.

Buffett believes a successful investor doesn't focus on being with or against the crowd. He remains focused on his goals.

Rule 3: If The Business Does Well, the Stock Eventually Follows

Buffett knows that investing in a stock equates to owning a piece of the business. So Buffett seeks out businesses that exhibit favorable long-term prospects. Does the company have a consistent operating history? Does it have a dominant business franchise? Does the business generate high and sustainable profit margins? Finally, is the company's share price trading below expectations for its future growth?
If so, it's a stock Buffett may want to own.

Buffett never buys anything unless he can write down his reasons why he'll pay a specific price per share for a particular company. Do you do the same?

Rule 4: It's Better to Buy a Great Company at a Fair Price Than a Fair Company at a Great Price

Buffett is a value investor; he likes quality stocks at rock-bottom prices. His goal is to build more operating power by owning stocks that generate solid profits and capital appreciation for years to come. During the recent financial crisis, he stockpiled great long-term investments by investing billions in names like General Electric and Goldman Sachs.

To pick stocks well, set down criteria for uncovering good businesses, and stick to their discipline. For example, seek companies that offer a durable product or service and also have solid operating earnings and the germ for future profits.
Or, you might establish a minimum market capitalization you're willing to accept, and a maximum P/E ratio or debt level. Finding the right company at the right price -- with a margin for safety against unknown market risk -- is the ultimate goal.

Remember, the price of a stock isn't the same as the value you get. Successful investors know that.

Rule 5: My Favorite Holding Period Is Forever

How long should you hold a stock? Buffett says if you don't feel comfortable owning a stock for 10 years, you shouldn't own it for 10 minutes. Even during recent times, Buffett loyally held on to the bulk of his portfolio.

Unless a company has suffered a sea change in it's prospects, such as impossible labor problems or product obsolescence, a long holding period will keep an investor from being too fearful or too greedy. Fear and greed cause investors to sell stocks at the bottoms or buy at the peaks -- thus destroying portfolio appreciation for the long run.

From Stephanie Loiacono and investopedia.com

The recent financial meltdown didn't change anything. The unfussy sayings from the Oracle of Omaha still RULE! So you see, we don't have to be experts when we already have them in our back pockets.

P.S. I do wonder, though, how Mr. Buffett would fare if truly lost everything.