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 basement 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)

FAQs

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

A: Five rules drawn from Warren Buffett's wisdom for potentially building wealth include investing for the long term, staying informed, maintaining a competitive advantage, focusing on quality, and managing risk.

What are the 5 rules of money Warren Buffett? ›

Warren Buffett's 5 Golden Rules:
  • Invest in What You Understand: Action: Before diving into any investment, take the time to research and understand the business or industry thoroughly. ...
  • Value Investing: Action: Look for undervalued assets with strong fundamentals and long-term growth potential.
Apr 11, 2024

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. This protects against material losses should that single company perform poorly or become insolvent.

What is the Buffett rule of investing? ›

“The first rule of investment is don't lose. The second rule of investment is don't forget the first rule.” Buffett famously said the above in a television interview.

What are the principles of Warren Buffett's investment? ›

Some of his most well-known principles include the following: “Price is what you pay, value is what you get.” One of Buffett's most famous quotes highlights his focus on value investing. He believes that it is more important to focus on the value a company provides, rather than simply its stock price.

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 rule never lose money Buffett? ›

Warren Buffett 1930–

Be fearful when others are greedy, be greedy when others are fearful. Rule No 1: never lose money. Rule No 2: never forget rule No 1.

What is the 1 investor rule? ›

Key Takeaways: The rent charged should be equal to or greater than the investor's mortgage payment to ensure that they at least break even on the property. Multiply the purchase price of the property plus any necessary repairs by 1% to determine a base level of monthly rent.

What are the two rules of Warren Buffett? ›

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 Warren Buffett's 90 10 rule? ›

The 90/10 strategy calls for allocating 90% of your investment capital to low-cost S&P 500 index funds and the remaining 10% to short-term government bonds. Warren Buffett described the strategy in a 2013 letter to his company's shareholders.

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

Buffett's 3 Best Rules for Stock Investing
  • Invest within your circle of competence.
  • Think like a business owner when buying equities.
  • Buy at inexpensive prices to provide a margin of safety.
Sep 22, 2023

What will never lose value? ›

Things that don't depreciate in value are things that don't lose their qualities as time passes or things that actually increase in value with the passage of time. These include goodwill, luxurious items, high-quality art, gems, alcoholic beverages, and land.

What is Warren Buffett's biggest investment? ›

Buffett's biggest investment last year

One stock that he consistently added to in 2023 and continues to buy in 2024, though, is Occidental Petroleum (NYSE: OXY). The company holds a strong position in the Permian Basin, giving it access to some of the lowest-cost oil supply in the country.

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 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).

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