risk
Rule 1: never lose money
The rule
Rule 1: never lose money. Rule 2: never forget rule 1. A fall and a rise are not equal. Fall 50%, and you need a 100% rise just to get back to where you started.
Where it flips
'Never lose money' cannot mean 'never take any risk'. It means never take the kind of loss you can never recover from. A short wobble in a long-term index is not the loss he means.
Buffett's rule is really about how unfair losses are. A gain and a loss do not cancel out. Down 50%, then up 50%, leaves you at 75, not 100. So big falls cost far more than they look. This is why avoiding a loss you cannot recover from matters most. Avoid heavy borrowing, avoid products that cannot bounce back, and do not sell in a panic. In R0 this is why you build a base that never forces you to sell at the bottom.
A worked example
₹1,00,000 falls 50% and becomes ₹50,000. To get back to ₹1,00,000, it must now rise 100%, not 50%. The hole is deeper than the fall. [illustrative]
How to spot it
- ·no borrowing that can force a sale
- ·holdings you can keep through a fall
- ·you know the difference between a short dip and a loss you never get back
Warren Buffett · Berkshire Hathaway shareholder letters