Monday, June 13, 2011

Warren Buffett’s Two Rules of Investing (and How You Can Nail Them)

Warren Buffett’s Two Rules of Investing (and How You Can Nail Them)

Unarguably one of the greatest and most successful investors the world has ever seen, Warren Buffet’s views  on investing are considered golden, and rightly so. Mr. Buffet has laid out two basic rules:

Rule One: Never Lose Money.

Rule Two: Never Forget Rule One.

A quick Internet search would return volumes about these rules, but ninety-nine percent of those commentators claim that investors are not supposed to take these rules at face value – because that was obviously not Mr. Buffett’s intention? Their central theme seems to be that someone as smart as Warren Buffett knows better: it simply is not possible to never lose money.

While I have never met Mr. Buffett, so I cannot speak, clarify, or try to gauge his intentions with those rules, I’d like to point out two quick things.

First and foremost, if (and only if) you assume that investors must invest their money directly in the stock market by using individual stocks, mutual funds of some sort, or any other traditional variable investment that goes up and down directly with the markets, then Mr. Buffett’s rules are indeed not to be taken seriously. In that case, I’d say they don’t even make sense. I believe we can all agree that the world’s most novice investor would understand that, in that instance, those two rules are a complete joke!

Having said that, secondly, if you look (you don’t have to examine, just look) at the rules again, you’ll probably agree with me that they are pretty cut and dried, right? It seems to me that there’s no meaning to them other than exactly what they say. Question: Why would a shrewd investor of the caliber of Warren Buffett (and this is the legendary Warren Buffett we’re talking about here) present rules that are backwards, require F.B.I training to decode, and above all seem impossible to follow?

Here’s the thing, though: I can tell you with 100 percent certainty that it is possible to pursue an investing strategy that will allow you to make decent stock-market-based gains during those years when the stock market is up and guarantee (yes, guarantee) that you’ll never lose money when the market plummets.

The approach is simple. It just links your investment dollars to the stock market, so to speak – as opposed to putting the money directly into the market. This ensures that your principal or capital is guaranteed. Then, you will receive a minimum guaranteed interest rate which will be added to your principal if the market dips or gains less than that minimum. There is a cap on the maximum gains your account can earn, but it’s as simple as that.

By way of a quick hypothetical example, let’s say that your minimum guaranteed rate is 2 percent, while the cap is 15 percent and it’s linked or tied to the performance of the S&P 500 index. You invest $100,000. All things being equal, in the worst case scenario of the S&P 500 index losing money that year, your $100,000 principal would grow by the 2 percent minimum ($2,000) to $102,000. Yes!

If you use this approach, you’ll never lose money when the market dips. In fact, in this given scenario, you’ll make money by picking up the minimum guaranteed rate. On the other hand, if the S&P 500 index were to gain say 10 percent, your $100,000 would grow by 10 percent or ($10,000) in this example, because the upside cap is 15 percent.

The bottom line is that I don’t claim to know what Mr. Buffett intended when he shared those two rules. But I’m telling you that as an investor you can make those rules a reality. After all, if you keep taking dips here and there, isn’t there a very real possibility that you could wind up losing the very principal you began with in the first place?

As for the “experts” who are still trying to explain and convince investors that these rules are not meant to be taken literally I’d suggest they get real and climb out of the traditional boxes. We are living in a new economy and new age where the challenges investors face are not the same as those of yesteryear, when almost everyone could count on a pension, and therefore count their own savings as just gravy money. Your retirement is certain and real – isn’t it time you invested that way?
Contact a financial professional at Laser Financial Group to schedule your complimentary appointment TODAY. Learn how you, too, can create a strategy that will enable you to make Warren Buffett's rules a reality for YOU. 301.949.4449 or

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