Warren Buffett, the chair and CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), is often regarded as the greatest investor of all time.
Though he's pushing 90, Buffett has shown no signs of slowing down or of stepping back from the game of investing – which he's been at since he was a child.
As such, I think Warren Buffett is someone we should all look up to and strive to learn from. It's not just anybody who can build a ~US$476 billion company over a lifetime, after all.
Buffett has dished out a smorgasbord of folksy anecdotes and investing advice over his long career. But for me, one of his quotes stands above all else and it goes something like this: "The first rule of investing is don't lose money and the second rule of investing is don't forget the first rule – and that's all the rules there are."
Sounds absurdly simple, doesn't it? You might even be forgiven for dismissing this 'rule' as plain old common sense.
But within it lies the true secret to never losing money on the share market, one of the biggest bugbears that holds most people back from investing in the first place.
Everyone knows the share market is a volatile place to have your money. Yes, most of the time it does go up. But it's those periods where the market crashes and investors' portfolios lose 10%, 20% or 30% of their value in short periods of time that really scare most people. Fair enough too.
But when Warren Buffett made this remark back in 1985, he also made a follow up remark which is often left out of this quote. He also said, "If you buy things for far below what they're worth and you buy a group of them, you basically don't lose money".
And that's the real secret to unlocking the wisdom of Buffett's paramount rule.
Again, it sounds so simple – buying things below what they're worth…
But this is where things get tricky (and lucrative). It's the function of the stock market to put a value on individual companies. Most of the time, the market gets it right. But not always. It's finding these discrepancies that really made Buffett wealthy and it's how you can follow in his footsteps.
Invest in the ASX 200 like Warren Buffett
Consider the recent market crash we've just gone through. Back on 23 March, the market placed a value of $53.44 per share on Commonwealth Bank of Australia (ASX: CBA). Yesterday, the market was valuing CommBank's shares at $72.20.
Now CommBank's business hasn't really changed since then. But its market value has. Anyone who exploited this detachment would be sitting on a healthy 35% gain today by following in Buffett's footsteps and buying something below what it's really worth.
Betting against the crowd is never fun or easy. But it's how you can really get some healthy outperformance in your portfolio.
