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.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the 'five best ASX stocks' for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now...

See The 5 Stocks *Returns as of 30 April 2025

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

Prediction: This artificial intelligence (AI) stock will be worth $5 trillion in 3 years

Let's take a closer look at the catalysts that could propel this stock toward that valuation.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
International Stock News

This Artificial Intelligence (AI) chipmaker just got a game-changing boost from Amazon, and Nvidia investors should be paying close attention

Amazon just made a notable investment in Nvidia's top rival.

Read more »

Happy man working on his laptop.
International Stock News

A once-in-a-decade opportunity: Here's why I'm buying Alphabet stock like there's no tomorrow

Alphabet's stock rarely gets this cheap, and right now could be a once-in-a-decade opportunity to scoop up shares at a…

Read more »

A woman looks questioning as she puts a coin into a piggy bank.
International Stock News

Is Warren Buffett's Berkshire Hathaway the smartest investment you can make today?

So, with all the uncertainty, is Berkshire Hathaway the smartest investment you can make today?

Read more »

Warren Buffet
International Stock News

7 ways Warren Buffett changed my investing approach

I'm a big fan of Warren Buffett, and have been for many years.

Read more »

iPhone with the logo and the word Google spelt multiple times in the background.
International Stock News

Down 12% this year, should you buy Alphabet stock?

The Google owner is underperforming the Nasdaq Composite, which has rallied in recent weeks.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
International Stock News

Missed out on Apple in 2012? Buying Nvidia stock today could be your second chance

By now, it's clear that artificial intelligence (AI) is the next major technology platform.

Read more »

Robot humanoid using artificial intelligence on a laptop.
International Stock News

3 reasons Amazon stock looks like an incredible bargain right now

Here are three reasons Amazon stock looks like a rare bargain at current levels.

Read more »