What Are Warren Buffett's 5 Rules of Investing, and How Can You Use Them to Your Benefit? (2024)

Doing your homework may be the most important step you take as an investor.

The best laid plans tend to be simple, and there's nothing complex about Warren Buffett's five rules of investing. Apart from being a business magnate and philanthropist, Buffett is known for living a simple life and dispensing simple advice to others. Here's Buffett's take on the five basic rules of investing.

1. Never lose money

Given that Buffett lost billions during the financial crisis of 2008, his first rule of investing may strike you as odd. However, Buffett isn't suggesting you can't ever lose money; he's underscoring the mindset an investor should have.

Takeaway: Do your homework (really do your homework) before investing. Don't make a financial decision without knowing what you're getting into, and never say to yourself that it's okay to lose money. If you're going with a new brokerage, learn everything you can about that firm. Know the pros and cons of working with them before signing up. If you're interested in a particular asset, spend time learning about the risks and the odds of success.

Bonus rule: Never forget rule No. 1

Obviously, Buffett has experienced far more financial wins than losses, but losses teach us something. In Buffett's case, it's to slow down and make careful investment choices.

Buffett is also famous for his "everyday man" approach to living. After becoming one of the richest people in the world, he didn't move into a McMansion or begin having all his meals prepared by a world-class chef. Instead, Buffett remained in the same house he's lived in since 1958 and regularly picks up McDonald's for breakfast. While some may call him a spendthrift, Buffett remains mindful of the best ways to put his money to work.

Takeaway: Investing is serious business. It's tough to keep your eye on the ball while showing off to friends.

2. Never invest in businesses you cannot understand

According to Buffett, "Risk comes from not knowing what you are doing." His advice is to only put your money into things you fully understand and can explain.

Takeaway: Doing your homework should lead to understanding a potential investment. If you study an investment but still don't understand how it works or what it's supposed to do, walk away.

3. Our favorite holding period is forever

Investing is a long-term endeavor. Once you've studied what you're getting into and made an investment, considering it long term allows you to tune out the natural ups and downs it will experience. When you think of an investment as a long-term commitment, you're far less likely to panic and sell at the wrong time.

Takeaway: Do your homework, trust what you've learned, and let your investment ride.

4. Never invest with borrowed money

Buffett calls it "insane" to risk what you have by borrowing money to make an investment. Although a stock may be taking off like a rocket today, it could crash to the ground tomorrow. If you borrowed money to get in on the hot investment, you'll end up with worthless stock and additional debt.

Takeaway: There's no such thing as a sure thing. All investments have built-in risks. If you can afford to invest with your own money, your best move is to wait.

5. Be fearful when others are greedy

Buffett's full quote is, "Be fearful when others are greedy and be greedy when others are fearful."

The right time to buy is when others are running around like characters from Chicken Little, convinced the sky is falling. That's when bargain basem*nt prices are to be had. And if history has shown us anything, it's that those who invest when prices are low are positioned to make the greatest profit when prices begin to rise.

On the other hand, when others are gobbling up stock they're sure will make them rich, it's your turn to be cautious.

Takeaway: You may not be able to time the market, but you can make it a goal to buy low and sell high. Don't get caught up in the hype.

Warren Buffett has made and lost billions. If anyone is in a position to share useful investing tips, it's the Oracle of Omaha.

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What Are Warren Buffett's 5 Rules of Investing, and How Can You Use Them to Your Benefit? (2024)


What Are Warren Buffett's 5 Rules of Investing, and How Can You Use Them to Your Benefit? ›

This sort of five percent rule is a yardstick to help investors with diversification and risk management. Using this strategy, no more than 1/20th of an investor's portfolio would be tied to any single security.

What are Warren Buffett's 5 rules of investing? ›

Here's Buffett's take on the five basic rules of investing.
  • Never lose money. ...
  • Never invest in businesses you cannot understand. ...
  • Our favorite holding period is forever. ...
  • Never invest with borrowed money. ...
  • Be fearful when others are greedy.
Jan 11, 2023

What is the 5 rule of investing? ›

This sort of five percent rule is a yardstick to help investors with diversification and risk management. Using this strategy, no more than 1/20th of an investor's portfolio would be tied to any single security.

What are Mr. Buffett's three rules for investing? ›

What are Warren Buffett's biggest investing rules?
  • Rule 1: Never lose money. This is considered by many to be Buffett's most important rule and is the foundation of his investment philosophy. ...
  • Rule 2: Focus on the long term. ...
  • Rule 3: Know what you're investing in.
Mar 6, 2024

What are the golden rules of investing Warren Buffett? ›

The more you care, the more they grow and more they grow, more they return. Buffett says one should never put his|her hard-earned money in the investments they do not understand. It is like buying something with no use.

What is an example of Warren Buffett 25 5 rule? ›

The rule's origin is reported as advice given by Buffet to his personal pilot, Mike Flint. Flint asked Buffet for career advice, leading to Buffet thinking of the 5/25 rule. Buffet asked Flint to list his top 25 career goals, pick the top five, and avoid the rest until the top five are achieved.

What is Buffett's first rule of investing? ›

Billionaire investor Warren Buffett famously said: “The first rule of an investment is don't lose money. And the second rule is don't forget the first rule.”

What is the Buffett rule number 1? ›

Buffett is seen by some as the best stock-picker in history and his investment philosophies have influenced countless other investors. One of his most famous sayings is "Rule No. 1: Never lose money.

What is the number 1 rule investing? ›

Warren Buffett once said, “The first rule of an investment is don't lose [money]. And the second rule of an investment is don't forget the first rule.

What is the rule never lose money Buffett? ›

Warren Buffett 1930–

Rule No 1: never lose money. Rule No 2: never forget rule No 1. Investment must be rational; if you can't understand it, don't do it. It's only when the tide goes out that you learn who's been swimming naked.

What is Warren Buffett's 90 10 rule? ›

Warren Buffet's 2013 letter explains the 90/10 rule—put 90% of assets in S&P 500 index funds and the other 10% in short-term government bonds.

What is the Warren Buffett 70/30 rule? ›

A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds.

What is the Buffett's two list rule? ›

Buffett presented a three-step exercise to help streamline his focus. The first step was to write down his top 25 career goals. In the second step, Buffett told Flint to identify his top five goals from the list. In the final step, Flint had two lists: the top five goals (List A) and the remaining 20 (List B).

What will never lose value? ›

Diamonds. "Diamonds have and retain a market value that is either consistent or increases over time," said jeweler and diamond expert Dan Moran of Concierge Diamonds.

What are the Warren Buffett Way principles? ›

The principles included: Purchase businesses with excellent long-term prospects. Purchase businesses at a large discount to their intrinsic value. Purchase businesses with a high return on invested capital.

What are the 4 golden rules investing? ›

They are: (1) Use specialist products; (2) Diversify manager research risk; (3) Diversify investment styles; and, (4) Rebalance to asset mix policy. All boringly straightforward and logical.

What is the 10 5 3 rule of investment? ›

According to this rule, stocks can potentially return 10% annually, bonds 5%, and cash 3%. While these figures are not guarantees, they serve as a guideline for investors to forecast potential returns and adjust their portfolio accordingly.

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