“Rule #1: Never lose money. Rule #2: Never forget Rule #1.”
- Warren Buffett

On the surface, what could be simpler than this? Just don’t lose money. But what does this really mean? Is Buffett suggesting investors avoid buying anything that might lose money? I have personally promised that anybody who invests in stocks, either directly or indirectly, will eventually lose money. I hope the loss will be temporary, but investors who react quickly to losses by selling their holdings lock those losses in, making them permanent.

Warren Buffett is the famous CEO of Berkshire Hathaway (a company that in many ways resembles a mutual fund because of its wide investment holdings). That company has lost considerable money from time to time on its own investments. So has he violated his own rules?

In my view, this quote is about the difference between being an investor and being a speculator. That difference has to do with the probability of getting a return on your investment. An investment is something that has a high probability of generating a positive return. A profit, in other words. A speculation includes the possibility of a positive return, but also a relatively realistic probability of no return or even a loss.

Buffett has become good friends (and co-philanthropists) with Bill Gates, co-founder and chairman of Microsoft Corp. In the days when Microsoft was a new darling of the stock market, Buffett took a pass on buying Microsoft stock, saying he didn’t understand the technology behind it. (Relatively few people did, and relatively few of us still do even today.) Technology stocks tend to fall into two camps: Overwhelming successes like Cisco and Google and Microsoft, and eventual duds like most of the early makers of automobiles and computer hardware. Therefore, technology stocks tend to be speculative. I think that may be what’s behind this quote from Buffett. What do you think?


“If you spend 15 minutes a year studying the economy, that’s 10 minutes too many.”

- Peter Lynch

I wouldn’t be surprised if Warren Buffett agrees with this sentiment from the famous manager of Fidelity’s Magellan Fund in its early years. I also agree that for most people, 15 minutes a year trying to figure out the U.S. economy is not the best use of their time. If you’re an economist, or if you’re studying economics, of course it makes sense. But if you’re an investor, there’s no payoff that I have ever been able to identify.

The comment could come from any of thousands of analysts who don’t worry about the market on a day-to-day basis. They see their job as identifying companies that are likely to do well in the future.

My approach is to identify asset classes (groups of hundreds and thousands of individual companies) that are likely to do well in the future. Regular readers can probably recite them by heart: U.S. large-cap stocks, U.S. large-cap value stocks, U.S. small-cap stocks, and so forth. I have much more confidence in those asset classes than I do in any individual stocks I might choose.


“The investor’s chief problem, perhaps his worst enemy, is likely to be himself.”

- Benjamin Graham

Ben Graham, considered to be the father of modern security analysis and value investing, was a mentor and teacher to Warren Buffett. Legend has it that Graham awarded a grade of “A+” only one time, and it went to Buffett.

I completely agree with this quotation. If textbooks, research and the “right answers” were enough to make people successful investors, we could all be billionaires. The right answers are out there, fairly easily available to anybody who looks for them. Yet most people fail to achieve a high level of investment success.

Why is that? One big reason is psychology. You know you should buy low and sell high. But doing that doesn’t feel comfortable, and if you’re typical you have a hard time doing it. There’s a Grand Canyon of difference between understanding what you should do and actually doing it. I’ve devoted a chapter of my book “Live It Up Without Outliving Your Money” to the psychology of successful investing. One of the things I show is that your own emotions are among your biggest hurdles.

As investors we tend to trust too easily and place that trust in the wrong hands. We want to believe that anybody we know and like would naturally have only our best interests at heart. As a result, we get taken advantage of too many times.

We want to focus on success and skip over the potential dangers. We feel safer doing what everybody else is doing, even though that is very often the wrong thing to do. We believe we – or the experts we have identified – are smarter than average, so we refuse to settle for the returns of the markets. Instead we ratchet up our level of risk in order to “prove” our superiority. Far too often, this backfires.


“Don’t look for the needle. Buy the haystack.”

- John Bogle

Imagine the countless hours of stock-picking and fund-picking research you could save if you were willing to buy “the haystack” of investing, essentially the whole market. If you actually enjoy sorting through a haystack looking for the elusive pins that everybody else has missed, that’s fine if you regard it as recreation. There’s always a chance, however slim, that you’ll find a really nifty needle. But don’t kid yourself into thinking that picking a few stocks amounts to serious investing.

If you are so highly competitive that you must frantically search for the needle, all I can do is wish you luck. You’ll need it, because you’ll have the company of hundreds of thousands of other investors who think they can hunt better than you can. If entertainment and excitement is what you want, you may find it in the hunt. I just hope you’re also prepared for disappointment.

Those of us who buy the whole haystack expect to outperform most of those frantic seekers. We expect to do it with less risk, less stress and less expense. If your ultimate aim is to get the best return for the amount of risk you take and effort you spend, the haystack is the way to go.