Posted on another thread:
Warren Buffet rule on money management:
Rule #1
Don't lose money
Rule #2
See rule #1
Now this is really quite beautiful in its simplicity. And yet its simplicity is not the simplicity of the statement but the simplicity of the underlying thought process.
What is the definition of losing money?
Well the answer to that depends on your frame of mind.
Do you check your stocks every day?
If they have gone up today, but dropped yesterday, did you make money? loose money?
To buffets way of thinking this type of thought process is irrelevant, because if you are an investor you should already have a good idea what the underlying value of your investments are.
The fact that Mr Market decides to price them at one point today, another point yesterday, and probably another point tomorrow is irrelevant.
If you are an investor, Mr Market exists soley for your own benefit. Mr Market is a manic depressant. His mood is always changing, sometimes he is confident and will pay very high prices for your assets, sometimes he is afraid and will only pay very low prices.
So for the investor you must use Mr Markets mood swings to your own advantage.
When Mr Market is feeling very confident, probability is he is willing to pay a price much higher than the value price, so you can sell to Mr Market. When Mr Market is feeling very scared, probability is he is willing to pay a price much lower than the value price, so you can buy from Mr Market.
So for the investor the only purpose of Mr Market is to determine whether its a good time to buy or sell from him.
But the good news is Mr Market never ever gets upset with you. He will constantly come back to you with an offer price depending on his mood.
Understanding this, you will understand Buffet's definition of loosing money.
Loosing money is 'loosing permanent personal financial capital'.
Emphasis here is on permanent.
This thought process is the same as Howard Marks (which I have strongly encouraged people to read, his mentality is very similar to Buffet but he is much more open on his thought process, Buffet never talks in detail about his thought process).
So according to Buffet:
Don't loose money???????
Does this apply to each specific allocation of capital???????
NO. You will loose sometimes on an individual position (think an individual share, individual business etc), but if your overall net wealth value is increasing, then you have adhered to Buffet's rule.
Nobody is right 100% of the time including Buffet on every capital allocation.
The underlying objective is to treat capital allocation the same as an insurance company. So long as more decisions result in a positive return than a negative return, overall the return should be satisfactory, so long as the risk procedures for each allocation of capital have been made in an intelligent manner.
Buffet agrees with other intelligent investors out there that diversification for the sake of diversification leads to deworsification..
But Buffet always diversifies, look at his business interests. The difference between Buffet and some broad based fund manager, is that Buffet is diversifying between different asset classes, opportunities etc when they make intelligent sense to do so. He doesn't diversify just for the sake of diversifying.
So he is effectively self insuring in an intelligent manner.
When he cant find present opportunities to further diversify intelligently, he holds cash.
Because he never gives dividends, he cash holdings is always constantly building. All those good prior decisions in the allocation of capital result in cash flow back to him. He will then decide when its intelligent to deploy that cash.
So hopefully now you understand when buffet says never loose money.
Warren Buffet rule on money management:
Rule #1
Don't lose money
Rule #2
See rule #1
Now this is really quite beautiful in its simplicity. And yet its simplicity is not the simplicity of the statement but the simplicity of the underlying thought process.
What is the definition of losing money?
Well the answer to that depends on your frame of mind.
Do you check your stocks every day?
If they have gone up today, but dropped yesterday, did you make money? loose money?
To buffets way of thinking this type of thought process is irrelevant, because if you are an investor you should already have a good idea what the underlying value of your investments are.
The fact that Mr Market decides to price them at one point today, another point yesterday, and probably another point tomorrow is irrelevant.
If you are an investor, Mr Market exists soley for your own benefit. Mr Market is a manic depressant. His mood is always changing, sometimes he is confident and will pay very high prices for your assets, sometimes he is afraid and will only pay very low prices.
So for the investor you must use Mr Markets mood swings to your own advantage.
When Mr Market is feeling very confident, probability is he is willing to pay a price much higher than the value price, so you can sell to Mr Market. When Mr Market is feeling very scared, probability is he is willing to pay a price much lower than the value price, so you can buy from Mr Market.
So for the investor the only purpose of Mr Market is to determine whether its a good time to buy or sell from him.
But the good news is Mr Market never ever gets upset with you. He will constantly come back to you with an offer price depending on his mood.
Understanding this, you will understand Buffet's definition of loosing money.
Loosing money is 'loosing permanent personal financial capital'.
Emphasis here is on permanent.
This thought process is the same as Howard Marks (which I have strongly encouraged people to read, his mentality is very similar to Buffet but he is much more open on his thought process, Buffet never talks in detail about his thought process).
So according to Buffet:
Don't loose money???????
Does this apply to each specific allocation of capital???????
NO. You will loose sometimes on an individual position (think an individual share, individual business etc), but if your overall net wealth value is increasing, then you have adhered to Buffet's rule.
Nobody is right 100% of the time including Buffet on every capital allocation.
The underlying objective is to treat capital allocation the same as an insurance company. So long as more decisions result in a positive return than a negative return, overall the return should be satisfactory, so long as the risk procedures for each allocation of capital have been made in an intelligent manner.
Buffet agrees with other intelligent investors out there that diversification for the sake of diversification leads to deworsification..
But Buffet always diversifies, look at his business interests. The difference between Buffet and some broad based fund manager, is that Buffet is diversifying between different asset classes, opportunities etc when they make intelligent sense to do so. He doesn't diversify just for the sake of diversifying.
So he is effectively self insuring in an intelligent manner.
When he cant find present opportunities to further diversify intelligently, he holds cash.
Because he never gives dividends, he cash holdings is always constantly building. All those good prior decisions in the allocation of capital result in cash flow back to him. He will then decide when its intelligent to deploy that cash.
So hopefully now you understand when buffet says never loose money.
