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Rule #1: Never Lose Money
Berkshire Hathaway

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By rclosch
May 24, 2007

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In my opinion the most interesting nugget to come out of the annual meetings this year was something Charlie said in relation to the interpretation of "Rule Number One." Looking back now, my problem was that I have not been paying attention. I had always considered Buffett's edict to "never lose money" as more of a guideline than the rule. Sure it's better not to lose money, and it's important to be very careful about value when you open a position. But everybody takes losses, you know, "take your losses, let your profits will run" yada yada. I had always considered it good conservative management policy to take a small loss if the position started to go against you, and you couldn't see exactly where the bottom was going to form.

But, in one of the transcripts I read, I think it was from the Wesco meeting, Charlie was quoted as saying he doesn't remember Buffett ever taking loss. Wait a minute, Fifty years, and he's never taken a loss? I thought to myself, that can't be Charlie is getting senile, everybody takes losses. Then I started to think back over the years that I have followed Berkshire and tried to identify a position that ended in loss, and I couldn't do it. Sure there were losses, USAir for a while, but they ended up smelling like a rose. USG, they bought before the bankruptcy and held it as the stock went to single digits and stayed there for a couple years. But look at it now.

I even went back to my early years of following Berkshire, and identified copycat positions that I'd taken that didn't work out for me. But with these positions, I bought too late and sold to early. I would buy after Buffett's purchase had been announced, so I was always buying at a higher price than Berkshire had. If the stock went against me, I would take my small loss, out of fear of having to take a bigger one later. But, I doubt that Berkshire ever took a loss on any of the positions they held. We do not have very good information on the stocks he bough in the early eighties. But if Charlie says they were profitable I will take his word for it

Then I began to think about my own ideas. I have been very careful in valuations. And I haven't had to take many losses. Most of those losses occurred because, like many value investors, I tend to buy too early. The stocks reach a point were I feel, they are good value, but continue to drift down after I take a position. Then I get impatient, or I get nervous. I still like the stock, but I think to myself "If I take a small loss now. I can do something else with the money and get back in later, maybe at a lower price." The funny thing is, never works out that way. Maybe the stock does nothing for six months, but I never get back in. Eventually the stock starts to rally. So if I had just had more patience, or if I had more faith in my original purchase, the position would have been profitable.

So is "Rule Number One" really meant to be taken literally? Is it possible to go through life without ever taking loss? If you're Warren Buffett, clearly the answer is yes. In my case, maybe I can do better in the future. From now on I plan to take "Rule Number One" more seriously.

Rule Number One Rules


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