Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.

One of Warren Buffett’s famous quote is:
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.

Let’s look at to what extent not losing money is important in investment.

To illustrate,
if an investor loses 10%,
how much percentage does he have to earn, to go back to the pre-loss level ?

When he lost 10%, he left with 90% of his initial investment.

To go back to 100%, he will need to earn back the 10% he lost using what he has now, 90%.
Profit% he needs = 10%/90% = 11.11%

To generalise, if he lost x%, profit% he needs, to go back to pre-loss level is x%/ (100% - x%) .

Look at the table and graph.

we will be able to see:
as we lose more, it is more difficult to earn back to pre-loss level.
Just imagine, if we lost 50%, we need profit% of 100% to earn back to pre-loss level !

Therefore, to stress again :
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1. :-)


  1. I am a value investor and get a bit tired of hearing about warren buffet. Not because of his status as a value investor. All these folks that follow warren buffett think that they can become rich by buying berkshire hathaway stock' only problem is warren has repeatedly stated on nurious occasions that his holding company will not deliver the hugh returns that it delivered in the past' because of its size the holding company is forced to invest in large cap and mega cap stocks which do not generally produce very large returns. Maybe if a few of those buffett fans would really listen to warren for a change they might learn something.

  2. @dennis
    Very much agreed.
    I think most value investors now prefer to learn Warren Buffett ways to get rich, instead of buy his stocks to get rich.

    Most investors don't have AUM of that large size yet.


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