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 Fool.com. 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 Fool.com. 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 woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Nvidia share price slips despite 94% revenue growth

Q3 earnings beat expectations, but what about guidance?

Read more »

high, climbing, record high
International Stock News

Could the S&P 500 Index hit 6,500 by the end of 2025?

Could the index climb higher?

Read more »

a small child holds his chin with his head on the side in a serious thinking pose against a background of graphic question marks and a yellow lightbulb.
International Stock News

Is it too late to buy Nvidia shares?

Is Nvidia stock a buy ahead of its third-quarter earnings report tomorrow?

Read more »

a group of people stand examining a large glowing cystral ball held in the hands of one of the group members while the others regard it with various expressions of wonder, curiousity and scepticism.
International Stock News

Here's what to expect from Nvidia on November 20

Can Nvidia score another win?

Read more »

Two people lazing in deck chairs on a beautiful sandy beach through their hands up in the air.
International Stock News

2 no-brainer Warren Buffett stocks to buy right now

While replicating Buffett's success isn't possible, there are a handful of his investments that are no-brainer buys.

Read more »

A man with a beard and wearing dark sunglasses and a beanie head covering raises a fist in happy celebration as he sits at is computer in a home environment.
International Stock News

3 reasons to buy Nvidia stock before November 20

This week marks a big moment for tech investors as perhaps the most anticipated earnings of the year will be…

Read more »

A woman smiles over her shoulder as she sits in the driver's seat of a car with keys in hand.
International Stock News

Why Tesla stock just popped

Tesla stock raced ahead Monday after Bloomberg reported the incoming Trump administration's intentions around self-driving vehicles.

Read more »

A woman holds her hand out under a graphic hologram image of a human brain with brightly lit segments and section points.
International Stock News

Prediction: Nvidia stock is going to soar after November 20

Nvidia is scheduled to report third-quarter earnings on Wednesday.

Read more »