Of course, this rule cannot be interpreted literally. Warren Buffet’s rule no 1 refers to a prudent investor mindset to be mindful and not careless. An investor should be well informed and not take any chances of losing, and researching before investing is essential to understand what to expect from your investment.
Buffet only invests in the companies he has done thorough and comprehensive research. He doesn’t go into an investment expecting to lose money, and neither should you. The market swing and volatility are inevitable in stock investing. However, as Warren Buffet does, you should stay focused on your goal, even in good or bad times.
Buffett was convinced by Benjamin Graham’s book “The Intelligent Investor”—the British-born American economist, professor, and investor who is also known as the “Father of Value Investing”—that investing in a stock equates to owning a piece of the business. So, Buffett looks for companies with promising long-term prospects when looking for a stock to invest in.
Buffett is a value investor who seeks out high-quality stocks at bargain prices. His true goal is to increase Berkshire Hathaway’s operating power by investing in stocks that will generate consistent profits and capital appreciation over the year.
Why is value investing?
Share prices fluctuate dramatically throughout the year, sometimes within a week or even a day. However, a company’s revenue and cash flow rarely fluctuate as much. As a result, the share price does not always represent the company’s value. The price of a company’s stock reflects only what people are willing to pay for it at any given time.
Value investors, such as Warren Buffet, seek to profit from this by purchasing shares at significantly lower prices than their estimated intrinsic value. If the company’s value increase, it will be reflected in the stock price eventually, and value investors will make a great return by selling the stock.
Value investing works (over the long term) because it sometimes does not work (in the short term) -Joel Greenblatt
Although value investing sounds simple in theory, it is more demanding in practice. There are two main challenges in value investing. First, calculating a company’s actual intrinsic value can be difficult. Second, purchasing undervalued stocks goes against almost every human instinct, making it difficult to find the right one.
The bottom line
“Never lose money” is Warren Buffet’s rule no 1 and will always be. This advice reminds investors or novice investors who want to invest in stocks to be mindful and research before investing. Although it sounds simple, it is quite complex in practice.
Warren Buffet is an example of a successful value investor. With the strategy of buying companies with good potential at low prices, he can become an influential person in the investment world. In fact, becoming a successful value investor is a long journey.
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