What does it mean: Rule No. 1: Never lose money

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bgf
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Re: What does it mean: Rule No. 1: Never lose money

Post by bgf » Tue Jun 19, 2018 9:20 am

bottlecap wrote:
Tue Jun 19, 2018 9:01 am
bgf wrote:
Tue Jun 19, 2018 7:55 am
nisiprius, i think your criticism/attacks on buffett are unfair and uncalled for. he is one of the greatest investors and capital allocators of all time. he has gone above and beyond just about any other executive or fund manager in teaching others and describing the inner workings of Berkshire through his shareholder letters. there is so much more meat on the bones of what buffett has written than anything bogle has ever written.

i think your posts are misleading and unfairly characterize snippets of what buffett has said.
I don’t see how you could possibly view any of what was said as criticism or attacks. The point is simply that we can’t know what he means and that he clearly can’t mean “don’t lose money" because a) it’s not meaningful advice and 2) WB has lost money before.

How is pointing this out unfair?

JT
it is a continuation from the 'bonds are a terrible investment' thread and probably others... buffett is not, has never been, and has never claimed to be a personal financial advisor to anyone, let alone your average joe retiree. if nisiprius has questions about valuing companies, security analysis, corporate taxes, capital allocation, accounting, etc., much can be learned from reading things by Buffett and about Buffett. Maybe Nisiprius knows most of that stuff already; i have no idea. i just don't think that Buffett should be unfairly criticized for failing to do something he never intended to do.

Bogle wrote books about the average joe retiree investor. Buffett hasn't and probably has absolutely no desire to do so.

if you want to criticize Buffett, criticize him for his business decisions.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

gips
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Re: What does it mean: Rule No. 1: Never lose money

Post by gips » Tue Jun 19, 2018 9:30 am

nisiprius wrote:
Tue Jun 19, 2018 7:46 am
gips wrote:
Tue Jun 19, 2018 3:38 am
stock price decline might have nothing to do with Berkshire losing money. For example, if appple were to announce revenue down $1bln, they’d still be profitable but the stock price would decline.
"Might." Sure. That's the thing about Warren Buffett's pronouncements. Nobody can stop guessing or interpreting what they "might" mean. But, for the record, two of those big stock price losses:

6/19/98-3/10/2000, 48.9%
9/19/08-3/5/09, 50.7%

were associated with book value losses:
Buffett says the Omaha-based company's book value - assets minus liabilities - declined 9.6 percent to $70,530 per share in 2008.

Berkshire's book value declined only one other time under Buffett, and that was a 6.2 percent decline in 2001.
There are a dozen different ways to define what is meant by "to lose money." To an accountant, probably hundreds. Rather than say "we don't know what Buffett meant" and leave it at that, everything is playing the game of guessing the meaning of "lose money" in "Rule #1."
a loss in book value might not indicate a loss. additionally, the article you linked to makes my point. berkshire reported $4.99bln net income in 2008. IMO it's not worth our time debating the merits of Buffet's aphorisms. I doubt one could string together any ten words in the English language that couldn't be challenged from a number of viewpoints: "The truth is rarely pure and never simple" - oscar wilde

best,

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Re: What does it mean: Rule No. 1: Never lose money

Post by TonyDAntonio » Tue Jun 19, 2018 9:56 am

This thread has been fascinating. From the LTCM story I copied this quote:

“The people who are going broke in this situation are of two types, the ones who knew nothing and the ones who knew everything.”

I take this to mean that you're better off with this bit of oxymoronicism: In investing it's best if you know one thing: that you don't know nuthin'.

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Re: What does it mean: Rule No. 1: Never lose money

Post by grayfox » Tue Jun 19, 2018 10:59 am

Obviously Mr. Buffett was talking about Uncle Billy. https://www.youtube.com/watch?v=dsgR4aVBbsM

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Re: What does it mean: Rule No. 1: Never lose money

Post by grog » Tue Jun 19, 2018 11:16 am

I lost money once. If only I had known about this rule.

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Re: What does it mean: Rule No. 1: Never lose money

Post by gundlached » Tue Jun 19, 2018 11:20 am

Sounds like more of a folksy buffett-ism than an investment strategy.

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Re: What does it mean: Rule No. 1: Never lose money

Post by Call_Me_Op » Tue Jun 19, 2018 11:22 am

Don't know how you can make any (real) money without risking some loss.
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Re: What does it mean: Rule No. 1: Never lose money

Post by dbr » Tue Jun 19, 2018 11:23 am

gundlached wrote:
Tue Jun 19, 2018 11:20 am
Sounds like more of a folksy buffett-ism than an investment strategy.
Yes, that is the whole point. The real problem is in someone trying to figure out how that can be an investment strategy when it obviously can't be.

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Re: What does it mean: Rule No. 1: Never lose money

Post by bottlecap » Tue Jun 19, 2018 11:55 am

bgf wrote:
Tue Jun 19, 2018 9:20 am
bottlecap wrote:
Tue Jun 19, 2018 9:01 am
bgf wrote:
Tue Jun 19, 2018 7:55 am
nisiprius, i think your criticism/attacks on buffett are unfair and uncalled for. he is one of the greatest investors and capital allocators of all time. he has gone above and beyond just about any other executive or fund manager in teaching others and describing the inner workings of Berkshire through his shareholder letters. there is so much more meat on the bones of what buffett has written than anything bogle has ever written.

i think your posts are misleading and unfairly characterize snippets of what buffett has said.
I don’t see how you could possibly view any of what was said as criticism or attacks. The point is simply that we can’t know what he means and that he clearly can’t mean “don’t lose money" because a) it’s not meaningful advice and 2) WB has lost money before.

How is pointing this out unfair?

JT
it is a continuation from the 'bonds are a terrible investment' thread and probably others... buffett is not, has never been, and has never claimed to be a personal financial advisor to anyone, let alone your average joe retiree. if nisiprius has questions about valuing companies, security analysis, corporate taxes, capital allocation, accounting, etc., much can be learned from reading things by Buffett and about Buffett. Maybe Nisiprius knows most of that stuff already; i have no idea. i just don't think that Buffett should be unfairly criticized for failing to do something he never intended to do.

Bogle wrote books about the average joe retiree investor. Buffett hasn't and probably has absolutely no desire to do so.

if you want to criticize Buffett, criticize him for his business decisions.
The point is that no criticism has been leveled.

JT

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Re: What does it mean: Rule No. 1: Never lose money

Post by bgf » Tue Jun 19, 2018 12:15 pm

bottlecap wrote:
Tue Jun 19, 2018 11:55 am
bgf wrote:
Tue Jun 19, 2018 9:20 am
bottlecap wrote:
Tue Jun 19, 2018 9:01 am
bgf wrote:
Tue Jun 19, 2018 7:55 am
nisiprius, i think your criticism/attacks on buffett are unfair and uncalled for. he is one of the greatest investors and capital allocators of all time. he has gone above and beyond just about any other executive or fund manager in teaching others and describing the inner workings of Berkshire through his shareholder letters. there is so much more meat on the bones of what buffett has written than anything bogle has ever written.

i think your posts are misleading and unfairly characterize snippets of what buffett has said.
I don’t see how you could possibly view any of what was said as criticism or attacks. The point is simply that we can’t know what he means and that he clearly can’t mean “don’t lose money" because a) it’s not meaningful advice and 2) WB has lost money before.

How is pointing this out unfair?

JT
it is a continuation from the 'bonds are a terrible investment' thread and probably others... buffett is not, has never been, and has never claimed to be a personal financial advisor to anyone, let alone your average joe retiree. if nisiprius has questions about valuing companies, security analysis, corporate taxes, capital allocation, accounting, etc., much can be learned from reading things by Buffett and about Buffett. Maybe Nisiprius knows most of that stuff already; i have no idea. i just don't think that Buffett should be unfairly criticized for failing to do something he never intended to do.

Bogle wrote books about the average joe retiree investor. Buffett hasn't and probably has absolutely no desire to do so.

if you want to criticize Buffett, criticize him for his business decisions.
The point is that no criticism has been leveled.

JT
first, i want to apologize for derailing this a bit, and i definitely do not want it to appear as if i am criticizing nisiprius, who is clearly a large presence on this board and im sure has helped many people.

nisiprius' prior criticism of Buffett has been:

"My objection to Buffett is that he never seems to explain himself. He says what he says. What he says is short, cryptic, and incomplete. He does not have some longer book in which he fills things out.

Almost everyone who cites Buffett puts an interpretation on Buffett's words, and many fail to quote him correctly."

In response to something I said, Nisiprius responded:

"Now, if your point is that the shareholder letters should be interpreted as referring solely to how Buffett manages his business, and not as advice to ordinary individual investors, I would be fine with that, we agree, and you need not read the rest of this post. Except that people are constantly quoting him in this forum and elsewhere as if his remarks applied to individual personal investing."

That is, in fact, my position. I do not think that one should expect personal financial advice from Buffett, in the same way that one may expect it from Bogle or others who write specifically about retirement investing and focus on this or that tax advantaged account, this or that bond fund, whether one should include international or not, etc. these are important questions, and I, like many others, struggle with finding the 'correct' answers to those questions, but i am not going to read Buffett's shareholder letters to learn about the advantages of a Roth or diversification into emerging markets.

This is my point. People need to understand that fundamental difference between what we are doing and what Buffett does.

Full disclosure, i don't try to do what Buffett does because im completely unequipped to do it. what i do is allow him to do it for me.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: What does it mean: Rule No. 1: Never lose money

Post by plantingourpennies » Tue Jun 19, 2018 12:52 pm

bottlecap wrote:
Tue Jun 19, 2018 9:01 am

I don’t see how you could possibly view any of what was said as criticism or attacks. The point is simply that we can’t know what he means and that he clearly can’t mean “don’t lose money" because a) it’s not meaningful advice and 2) WB has lost money before.

How is pointing this out unfair?

JT
It's an unfair criticism because Nspirius, and yourself to some extent, are generalizing from your own inability (real or perceived) to understand Buffett's advice and saying that nobody can know what he means...which gives the perception that he isn't worth reading or listening to.

The reality is that his advice to investors is generally pretty straightforward, and fairly extensive. Furthermore, I don't think that Bogleheads could ask for a better friend in the investment community.

The actionable part for those reading this thread-Take some time to read BRK's annual letters, or tune into the next annual meeting. I think you'll come away with a greater appreciation of how difficult it is for investors to beat the market, the problems associated with market timing, and the brilliant simplicity of low cost mutual funds. There is a lot there for Bogleheads to like.

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Re: What does it mean: Rule No. 1: Never lose money

Post by Portfolio7 » Tue Jun 19, 2018 12:56 pm

bgf wrote:
Tue Jun 19, 2018 12:15 pm
This is my point. People need to understand that fundamental difference between what we are doing and what Buffett does.
I think this is a good point. It was never my intent when originally posting to suggest that we all should be following Buffett's investment advice. I was trying to understand something that I now know has been the cause of uncertainty and disagreement now and in the past.

I do think WB intended to make a point about risk, and there are many ways that Bogleheads focus on reducing risk. I do agree with Nisiprius that the full intent of that statement is not clear, because WB himself doesn't care to make it clear. I still think there are lessons to be learned from all types of investors, even if all we learn is to avoid what they are doing... (and others believe there is little value in this particular line of investigation, and that's fine.) It would be rank hubris to suggest any of us should change our approach due to WB's vague statements, but my hope was to deepen my understanding so that I felt more sure of my own investment style.

I appreciate everyone's comments, on this and the 2012 thread referenced above.
An investment in knowledge pays the best interest.

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Re: What does it mean: Rule No. 1: Never lose money

Post by plantingourpennies » Tue Jun 19, 2018 1:01 pm

bgf wrote:
Tue Jun 19, 2018 12:15 pm

first, i want to apologize for derailing this a bit, and i definitely do not want it to appear as if i am criticizing nisiprius, who is clearly a large presence on this board and im sure has helped many people.
Agreed-Nisiprius is one of my favorite posters, which makes his frequent critique of Buffett all the more baffling to me. There is no doubt that Nisiprius has done a great service for investors through participating in this forum.

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Re: What does it mean: Rule No. 1: Never lose money

Post by 2015 » Tue Jun 19, 2018 7:06 pm

One of the themes Buffet/Munger have been consistent on is don't do stupid stuff.

People like Buffet are easy targets to bash if you haven't taken the time to study he and Munger in depth, particularly Buffet, precisely because of the manner in which he speaks. I believe Buffet uses lots of metaphors because metaphoric thinking is among the better ways to engage in the critical skill of second-order thinking (he works with Munger, after all, who has written about metaphors). The article posted above is an example of first-order thinking. Second order thinking includes the overall context in which Buffet speaks and which existed when he made that and many other statements like it.

I'm not at all defending Buffet because yea, it takes a lot for me to get beyond that whole folksy marketing/huckstering (cherry coke photo ops when you own it? really?), but to me, it's no a big deal. Like everyone I read, I'm not interested in what's "right" or "wrong", I'm interested in whether a concept of never lose money is useful or not because in life it's much more likely something stupid will happen than not (far more can go wrong than right). For me, if I do stupid stuff like tilt, wilt, shake, bake, factor, valuate, use some fancy letters to include Greek ones, the possibility exists I'll end up needlessly losing money. OTOH, if I don't do stupid stuff and instead hang out with my 3 fund PF, minimize taxes and fees, and leave stuff alone chances are markedly increased that I will not lose money.

That's how I use it, anyway. Others may feel differently, but as I say, I'm not intersted in being "right", I'm interested in taking the most effective actions possible based on what's useful.

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Re: What does it mean: Rule No. 1: Never lose money

Post by bottlecap » Tue Jun 19, 2018 10:44 pm

plantingourpennies wrote:
Tue Jun 19, 2018 12:52 pm

It's an unfair criticism because Nspirius, and yourself to some extent, are generalizing from your own inability (real or perceived) to understand Buffett's advice and saying that nobody can know what he means...which gives the perception that he isn't worth reading or listening to.
No one said that WB "wasn't worth listening to" or that he was worth listening to, for that matter. The meaningless of this quote - if WB ever even said it - is self-evident, however. Moreover, everyone on the internet has a different opinion as to what it means and, frankly, none of the explanations make much sense.

Pointing out that not everything that drops from WB's lips is a nugget of pure gold is not an "unfair criticism."

Not even John Bogle is infallible around here. That doesn’t mean he's any less revered.

JT

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steve roy
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Re: What does it mean: Rule No. 1: Never lose money

Post by steve roy » Wed Jun 20, 2018 2:00 pm

A (distantly?) related quote from, I think, Bill Bernstein: “When you’ve won the game, stop playing.”

Meaning don’t take risks when you don’t have to. (Laddered CDs, anyone?)

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Re: What does it mean: Rule No. 1: Never lose money

Post by getthatmarshmallow » Wed Jun 20, 2018 3:27 pm

I read it as a wry joke. How do you get to Carnegie Hall? "Fly, yes. Land, no." Etc.

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Re: What does it mean: Rule No. 1: Never lose money

Post by ReadyOrNot » Thu Jun 21, 2018 2:38 pm

I can't say what someone really means, but you can phrase this rule so it seems to make sense, and seems to be consistent with what Mr. Buffett appears to do and Boglehead advice:
Invest in such a way that you will never have to sell at a loss.

That would mean investing for the long haul, in quality investments that you understand and are sure will grow over time, and you should be prepared and able to hold your investment long enough for this to happen.
Mr. Buffett appears to do this with businesses. Bogleheads appear to believe this can and should be done with broad-based low-cost quality index funds.

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Re: What does it mean: Rule No. 1: Never lose money

Post by Carol88888 » Fri Jun 22, 2018 1:44 pm

I think "never lose money" is meant to apply to the selection of individual securities with a great amount of concern for the price paid which is what determines the value. A great company bought at too high a price is a lousy investment. Look at the long dull patch Walmart ran into. Or even Microsoft for that matter.

Buffett carefully considers his downside first so that if he loses money he doesn't lose much, while positioning himself to great gains if he is correct in his analysis of the discounted cash flows that will be tossed off. But this is really tricky and requires a lot of work - too much for me, anyway.

I think value investing of the type practiced Warren Buffett is an extremely valid style of investing but lately it has underperformed growth. Also, as Berkshire has grown there has been more concern than going forward it will not beat the S&P 500. And even Warren has instructed his wife to be put into a S&P 500 index fund at his death. That was very telling to me.

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Re: What does it mean: Rule No. 1: Never lose money

Post by dbr » Fri Jun 22, 2018 2:32 pm

Carol88888 wrote:
Fri Jun 22, 2018 1:44 pm
I think "never lose money" is meant to apply to the selection of individual securities with a great amount of concern for the price paid which is what determines the value. A great company bought at too high a price is a lousy investment. Look at the long dull patch Walmart ran into. Or even Microsoft for that matter.

Buffett carefully considers his downside first so that if he loses money he doesn't lose much, while positioning himself to great gains if he is correct in his analysis of the discounted cash flows that will be tossed off. But this is really tricky and requires a lot of work - too much for me, anyway.

I think value investing of the type practiced Warren Buffett is an extremely valid style of investing but lately it has underperformed growth. Also, as Berkshire has grown there has been more concern than going forward it will not beat the S&P 500. And even Warren has instructed his wife to be put into a S&P 500 index fund at his death. That was very telling to me.
I think you have a good view of where this comes from. The point is that the context is Buffett figuring out what companies to take ownership of. The idea isn't of such a nature that it applies to people like me, or even you, investing in mutual funds. This is characteristic of a lot of things people hear Buffett or Bogle or someone else to have said.

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Re: What does it mean: Rule No. 1: Never lose money

Post by Phineas J. Whoopee » Sat Jun 23, 2018 4:11 pm

getthatmarshmallow wrote:
Wed Jun 20, 2018 3:27 pm
I read it as a wry joke. How do you get to Carnegie Hall? "Fly, yes. Land, no." Etc.
Practice, practice, practice.

And that's a joke that's no joke.

PJW

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Re: What does it mean: Rule No. 1: Never lose money

Post by burt » Sat Jun 23, 2018 5:39 pm

I guess I'm a Zvi Bodie fan.
From memory... in a Youtube video he says to look into the mirror every morning and say to yourself "don't lose money today".
He puts everything in TIPS. If the return of TIPS don't match your retirement plans.... work longer or save more.
I have a sizeable portion of my retirement savings in a TIPS fund. I can not, and will not, gamble with my modest retirement standard of living.
30/70 stock/bond. Age 62.

burt

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Re: What does it mean: Rule No. 1: Never lose money

Post by dbr » Sat Jun 23, 2018 6:04 pm

burt wrote:
Sat Jun 23, 2018 5:39 pm
I guess I'm a Zvi Bodie fan.
From memory... in a Youtube video he says to look into the mirror every morning and say to yourself "don't lose money today".
He puts everything in TIPS. If the return of TIPS don't match your retirement plans.... work longer or save more.
I have a sizeable portion of my retirement savings in a TIPS fund. I can not, and will not, gamble with my modest retirement standard of living.
30/70 stock/bond. Age 62.

burt
Well that is ironic considering that this thread started with a maxim from a man who says bonds are a terrible investment and that people should be 90% equities :shock: :twisted:

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Re: What does it mean: Rule No. 1: Never lose money

Post by nisiprius » Sat Jun 23, 2018 8:49 pm

dbr wrote:
Sat Jun 23, 2018 6:04 pm
burt wrote:
Sat Jun 23, 2018 5:39 pm
I guess I'm a Zvi Bodie fan.
From memory... in a Youtube video he says to look into the mirror every morning and say to yourself "don't lose money today".
He puts everything in TIPS. If the return of TIPS don't match your retirement plans.... work longer or save more.
I have a sizeable portion of my retirement savings in a TIPS fund. I can not, and will not, gamble with my modest retirement standard of living.
30/70 stock/bond. Age 62.

burt
Well that is ironic considering that this thread started with a maxim from a man who says bonds are a terrible investment and that people should be 90% equities :shock: :twisted:
With regard to TIPS, once again, Warren Buffett's statements have been incomplete and can only be understood by relying on guesses and interpretation to fill in the lacunae.

Warren Buffett, as far as I know, has never said that TIPS are a terrible investment. What he has said is something like this (from the 2011 letter):
Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire.
So, the terrible investments are called, simply "bonds."

Are TIPS bonds?

He might well be using the word "bond" in the technical sense, iin which one-to-ten-year Treasuries are "notes" and "bonds" refers only to long-term Treasuries. In that case, TIPS are not "bonds," they are "securities"--Treasury inflation-protected securities.

It is clear that the risk of bonds he is talking about is inflation risk. For that reason, my interpretation is that he probably does not mean to includes TIPS in the category of "bonds." Of course, it is not clear whether he would consider TIPS to be considered "currency-based investments." But, what investment is not "based on currency?"

In short, we don't know what he thinks about TIPS as retail investments. We just don't know. Because what he said just isn't clear on this particular point. Many of the Buffett fans in this thread will say "of course we know," because they are confident they can guess correctly at what he means... but it is a guess. Buffett could easily be clear if he wants to. He chooses not to be.

(We know he knows what TIPS are, because he mentions them in other shareholder letters--but not as actual investments, by Berkshire Hathaway or by anyone else, but only for their use in gauging inflation expectations).
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Re: What does it mean: Rule No. 1: Never lose money

Post by gips » Sun Jun 24, 2018 11:35 am

Buffet provided some nuance around the shareholder letter you quote:
http://fortune.com/2012/02/09/warren-bu ... and-bonds/

"The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability — the reasoned probability — of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period."

"High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments — and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.Under today’s conditions, therefore, I do not like currency-based investments"

I suppose we still don't know what Buffet thinks specifically of TIPS, but if one believes TIPS will improve purchasing power over time on a riskless basis, I believe Bufffet would be fine with them as part of an overall portfolio strategy.
Last edited by gips on Sun Jun 24, 2018 2:52 pm, edited 1 time in total.

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Re: What does it mean: Rule No. 1: Never lose money

Post by FOGU » Sun Jun 24, 2018 2:13 pm

dbr wrote:
Mon Jun 18, 2018 2:31 pm
Portfolio7 wrote:
Mon Jun 18, 2018 2:21 pm
I'm not so willing to entirely discount anything WB attaches importance to, and he repeats this 'rule' with gusto in the recent biographic documentary.

In simpler terms, I think he meant to be "risk averse", (rather than "loss averse"). The latter term is the more common understanding of the words he uses, so it's confusing to phrase it that way.
I suspect you are right. It could just come down to telling people not to be stupid. You could argue LTCM was stupid. But, be sure you are smart about your risks is probably a good interpretation. I note reading somewhere that his most important tool in judging a company to own was judging the people who would be running the company. Companies run by good people would be run well and not lose money. Another rule was to buy companies that could be bought at a fair price or lower and not at an inflated price. That is also controlling risk and does not lose money. I don't think those rules apply to attempting to time markets, however.
That is essentially how I have interpreted that quote. Don't put your money at risk without doing all the homework. Don't be stupid. Don't wing it. Don't fly by the seat of your pants where investments are concerned. Burn the midnight oil reading SEC filings for 30 years before buying a company. Basically know what you are doing when you invest.

I think it is also offered as an assurance to BRK shareholders that their investment is well placed and secure.
~ Don't just do something. Sit there. ~

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