Two Warren Buffett rules you should never forget

Buffett's strategy for investing can be ideal for risk-averse investors.

| More on:
Smiling woman at desktop and tablet

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Warren Buffett has been a prolific investor for decades, soundly beating the markets on a consistent basis.

What's noteworthy is that he hasn't generally done it by betting on big tech or emerging growth stocks in high-risk industries. His strategy centres around safety and not about taking oversized risks.

There are two Buffett rules in particular that investors would do well to always keep in mind when buying stocks. Let's look at them both.

Never lose money

This rule is so important that even his second rule is to not forget the first one. Not losing money in the stock market can seem impossible, especially in the current bear market. Even Buffett's business, Berkshire Hathaway, has lost money on its investments in the past and has even underperformed the S&P 500 Index (SP: .INX) in some years.

The nature of the stock market is that there will always be some risk. The key takeaway from Buffett's rule is to not take unnecessary or excessive risks and that the desire to avoid losing money should guide investors to making more calculated, strategic investment decisions, as opposed to jumping onto the latest meme stock.

Stop digging

This leads to another great Buffett quote: "The most important thing to do if you find yourself in a hole is to stop digging."

In other words, if you've taken on too much stock risk and gotten yourself into a hole (e.g., your portfolio is deep in the red), the temptation may be to take on even greater risk and swing for a 10-bagger investment that gets you out of the hole. But by doing so, you could end up with even greater losses.

By minimizing losses to begin with, investors can avoid the temptation to take on excessive risks entirely. One industry where you can find many safer stocks is healthcare.

Healthcare stocks for long-term investors

Not all industries have performed poorly during the current downturn in the markets. One segment that has bucked the trend is healthcare.

Consider healthcare giant Bristol-Myers Squibb (NYSE: BMY), a top-performing stock in 2022. Year to date, the stock is up an impressive 17%, while the S&P has declined by 21%.

Bristol-Myers is a top drugmaker that has solid fundamentals. Last year, the company had three products that generated more than $5 billion in revenue for the business: Revlimid, Eliquis, and Opdivo. And they all reported positive year-over-year growth of at least 6%.

The healthcare company has grown, in part, via acquisitions and in 2021 reported revenue of $46 billion -- more than double its $23 billion tally in 2018. It has also posted free cash flow of at least $13 billion for two consecutive years.

Another top healthcare stock that has performed reasonably well this year is Johnson & Johnson (NYSE: JNJ). Year to date, its shares are flat, but that would still satisfy Buffett's first and second investing rules by avoiding losses.

The popular drug manufacturer and medical device company recently reported encouraging earnings numbers.

Sales totaled $23.8 billion for its most recent quarter (ended in September) and rose 1.9% year over year. The business expects to generate operational sales growth, which excludes the impact of acquisitions/divestitures and translating foreign currency, of up to 7.2% this year.

These businesses are safe and are excellent examples of the types of companies to invest in if your priority is to avoid losing money.

Over the past decade, Bristol-Myers and Johnson & Johnson have generated total returns (which include dividends) of 190% and 213%, respectively. That's not far from the S&P 500 total returns of 223% over that time frame. And if the recent trends continue, the two healthcare stocks could continue to shrink that gap.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and recommends Berkshire Hathaway (B shares) and Bristol Myers Squibb. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Johnson & Johnson and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

A man in a business suit peers through binoculars as two businesswomen stand beside him looking straight ahead at the camera.
International Stock News

Where will Nvidia stock be in 1 year?

You might be late to the party.

Read more »

asx share price boosted by us investment represented by hand waving US flag across winning athlete
International Stock News

Is it too late for ASX investors to start buying US shares?

Should ASX investors start taking the gains from US shares like Nvidia off the table?

Read more »

A US flag behind a graph, indicating investment in US shares
International Stock News

Which US shares are ASX investors buying in 2024?

The ASX's most popular US shares contain some familiar names...

Read more »

A man and a woman sit in front of a laptop looking fascinated and captivated.
International Stock News

Prediction: 2 US stocks that will be worth more than Nvidia 5 years from now

These US stocks have a shot at surpassing Nvidia over the next few years.

Read more »

Digital rocket on a laptop.
International Stock News

Is Nvidia stock going to $150 in the wake of its high-profile 10-for-1 stock split?

Wall Street analysts are reviewing their models in the wake of Nvidia's stock split.

Read more »

A woman walks along the street holding an oversized box wrapped as a gift.
International Stock News

Better megacap stock: Nvidia vs. Microsoft

Megacap stocks have ruled the year so far. Is Nvidia or Microsoft better positioned for the second half of the…

Read more »

A man casually dressed looks to the side in a pensive, thoughtful manner with one hand under his chin, holding a mobile phone in his hand while thinking about something.
International Stock News

Is Nvidia stock a buy now?

Nvidia investors are looking ahead. But there is risk in counting on things that haven't happened yet.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
International Stock News

45% of Warren Buffett's $398 billion portfolio is invested in 3 artificial intelligence (AI) stocks

You won't find Warren Buffett chasing the latest stock market trend, but many of the stocks held in Berkshire Hathaway's…

Read more »