hi i'm jimmy in this video we're looking
at some of warren buffett's
laws of investing so i've been going
through and reading a bunch of different
uh buffett books books about warren
buffett is about his investing style
and i was trying to summarize them into
some color let's call it fundamental
laws of investing
that if we follow these we're more
likely to be successful
over the long run that's what this is so
let's jump right in i'm sure the rules
of investing that we've all heard warren
buffett say is
rule number one don't lose money rule
number two
don't forget rule one buffett has made
these these two lines
super famous i think many investors
would look at those two rules and say
yeah that sounds fantastic but i have no
idea where to start
so these laws are designed to get us to
the point that we are
less likely to lose money so our first
law of investing
is that we must know the risk of an
investment the genuine risk the true
risk
what is the real risk of that investment
and many times buffet has said
in different letters of different
speeches that he's given or different
interviews that he's given
that volatility and risk are not the
same thing
now i understand that volatility is
often something like a standard
deviation
is often used in many different formulas
and
you it's a nice quantifiable number and
people
often associate it with risk even when i
went to school to learn about this
it was taught as this is the measure of
risk
but if you logic it out it's not
terribly logical that
just because the stock moves more it is
somehow riskier it is very possible
the stock drops volatility would
increase but perhaps it is now less
risky than it was before at a higher
price
now when warren buffett talks about what
risk actually
is and these are very broad definitions
of risk
well the first thing that he talks about
is that the biggest risk
is the risk of not knowing what we're
doing and i think that
this is very obvious and this is one of
the reasons that many people are out
trying to research companies or learn
more about investing or taking courses
or going to school or whatever it is
it's to try to fill those knowledge gaps
because it is very important that we
have
some idea what we're doing and the
second part of this and probably the
more fitting part of this
is the risk of a permanent loss of
capital
and all this means is that when we go
out and we buy a stock and perhaps we
don't know that much about
the underlying business or maybe we go
and buy a stock option
and either that company goes out of
business or
the stock drops a huge amount and then
it gets bought out by somebody else so
we have we're forced to sell it at that
point
either way what we end up with is we end
up with a permanent loss of capital
where we invested
x we get back significantly less than
that and generally this will happen
from a mistake that we make outside of a
company just committing straight up
fraud
that's tricky to defend against but if
we
overpay for a company and then the
company drops
in price and then that gets bought out
by another company and they give us cash
for our shares if we paid 50
a share stock drops down to 30 and a
company
gets bought out at let's say 35 we lost
money that's a permanent loss of capital
and that's on us for overpaying now of
course that's an extreme
example we might not be forced into
selling the stock but
we might perhaps we should sell the
stock perhaps it was a poor investment
and we just made a bad decision early on
that leads us to the question of when do
we sell a stock
and this actually leads nicely into our
second law of investing and this one is
to make sure that
we look at investing as if we are
investing in a business
not in a financial instrument and i
think this is a crucial investing
mindset
to long-term successful investing now
buffett has talked about many times
he's talked about how he looks at the
companies he buys as if he's buying
businesses
not stocks buying stock is just the way
he goes about
buying the actual business and we should
do that exact same thing
far too many investors look they go out
and they buy a stock
and feel and look at it as a trading
tool
something we might get out next week or
next month or
if the stock goes up 20 or down 20
well we should jump in and we should
make a move and i think it's crucially
important that
if we are actually investing in a
business well we don't
look we're not always looking to make a
move i think
far too many times people are looking to
make a move just because they can make a
move
they want to either lock in gains or
they want to chase more profits
instead of looking for the best business
they can buy and buying it at a great
price or even a good price and i think
that this is a mistake
one example of this is that personally i
own shares of disney
and disney when i first when i bought it
well i had to ask myself
is do i want to own a piece of this
business do i want to own
disney as a business and once i had done
my research and i came to the conclusion
that personally yes
i wanted to own a piece of disney as a
business
well then i got to try to come up with a
fair value for the company itself
so i go ahead i do my analysis and i
come up with okay here's what i think
disney's the business is worth then you
try to pay
less than that and you got to be patient
buffett has also said many times
that the stock market is a it's a way to
transfer money from the inpatient
to the patient so it's crucial that we
remain patient and wait
for the business we really want to own
at a good price
now once we know the company and then we
try to come up with what the what we
think the company is worth
ideally again we want to pay less than
that but then when we comes
bringing us back to when do we sell well
buffett always says that his ideal
holding period is forever but let's
imagine that we can stick with that
mindset we want to hold it forever
but if we understand why we bought it
and while we bought it at the price that
we bought of that
then what we're waiting for is a
direction a directional change in the
business
perhaps the business two years from now
10 years from now
whatever it is after we've owned the
stock for a long time
well the business the direction of the
business change changes or maybe
the prospects of the business change and
we no longer like it well that's a very
logical reason to sell it
in fact i think that's more logical than
waiting to
then the stock is up 20 so i'm selling
it now so going back to my personal
disney example well i did a video a few
months back where i looked at my
where i did a video on my personal
investment portfolio and in that video i
talked about when i bought disney
and at that time this is what the stock
chart had looked like
now i bought disney stock back here in
this area
now i didn't buy them at the best
possible price the stock dropped all the
way into the 80s i believe
and i dropped mine i got a little bit
trigger happy when it fell below 100
per share and i bought my shares there
so i could have bought it about 10
lower but either way that happens but i
was very happy
with my price now when i did the video
on the overall portfolio i got far more
questions than i
would have expected asking up here at
this price
if in the video i said i thought it was
overvalued and i do i think up
at 180 190 per share disney does seem
somewhat overvalued
and people would ask well if it's
overvalued why not sell the shares
and for me the answer is well first when
i bought disney shares
i want to own disney the business for
the long term
i think 5 10 20 years from now disney's
going to be
bigger and better than they are today so
because i got it at such a good price
i'm more than happy to sit here
indefinitely and just wait and the other
reason why i would hesitate to sell
today is i once heard warren buffett say
that
you know he's owned coca-cola for like
40-something years why not sell all of
his shares
and take an enormous profit and as he
pointed out
why invite the taxman to the party now
at that time
i had owned my shares of disney for less
than a year so if i sell them
i have to pay short term capital gains
tax what is that 20 30
depending on everybody's individual
situation i'm giving up 30
let's say of the profits 25 whatever it
is right off the top
but now i'm sitting on this cash what am
i going to do with it right now i think
a lot of the stock market is overvalued
i'm having trouble finding any really
good undervalued businesses
with that being said am i just going to
sit in this cash
because if i sell it and i sit on the
cash well now inflation is chip
chipping away at it to me there's very i
don't have a logical reason why i would
sell
just because i could get a higher price
for it today now if the underlying
fundamentals of the business
change and they start going against the
reasons why i ultimately like the
business
well then i would certainly consider
selling it maybe the stock is higher
than it is today maybe it's lower
but either way i'm i'm trying to pay
attention
solely to the fundamentals and pay less
attention to whether or not i should
sell
because the quote is higher today that
being said
the next law of investing that we have
is to keep
saying no and this isn't just warren
buffett's law of investing many famous
investors have talked about
how many deals they reject how many
stocks as in the case of warren buffett
how many stocks he goes through before
he finally finds one
that he jumps in and buys the ratio
is enormous for the amount that he
discards the amount that he says no to
i think far too often investors start to
they want to miss the boat they care
more about
missing gains than they care about
avoiding losses
and the key to great long-term investing
is to wait for as warren buffett
puts it wait for the perfect pitch wait
for something
that is almost a sure swing and we can
get as many swings as we want
the more research we do the more
companies we look at the deeper of an
understanding we get
of different businesses the more
opportunities that get presented to us
and we get to decide when they are
pressed right
when they are priced wrong and we get to
sit there and be very patient
now in order to successfully pull off
this patience
is to be able to get over our very
harmful desire to move in and out of
positions
just because we can successful investing
long-term successful investing
is rooting in finding solid businesses
and buying them at good prices and
hosing them for long periods of
long period of time it's really that
simple
now this brings us to our next law of
investing and that is this one's
probably going to be a little
controversial
but that is that this time is never
different
now this is actually a throwback to a
great book called this time is different
and basically in the book what they do
is they go back and they look at
investing through many many many years
and they explain they prove how
things have shaken out very similar
similarly
each time and it's actually great read
so if you're curious i'll leave a link
to this book
in the description below i'll leave
amazon affiliate link
now recognizing that it is
it's never that different everybody i
i've seen
so many comments not everybody does it
but a lot of people
look at the situation and say oh my god
we've never had electric vehicles before
we've never had
you know this new technology that is
coming out and everything's so different
now
is it that different though i mean yes
of course electric vehicles
are a big change but there was a time we
didn't have any vehicles you know the
internet was invented the amount of
gradual change that has happened even
rapid change
has been here and every time
things revert to the mean it keeps
happening over and over again
but people i think by their nature most
people are
i think we're by and large somewhat
short-sighted and the point of all that
is that what we don't want to do is
because there's some new technology or
something
amazing that is genuinely happening that
doesn't mean we want to pay an obscene
price to get involved in it it might be
a great business
but surely down the road competition
will come
new creations will come at some point
all of today's technology will be old
technology will be replaced by something
new that is the way the world
eventually goes so if we obscenely
overpay for things today
that we our returns are going to be far
less impressive
than if we were more disciplined in the
long run so we really don't want to get
stuck
in this trap in believing that an
investment which is perhaps
way way overvalued today will become a
good investment because it's going to
become even more overvalued
you know the greater fool the the whole
greater fool theory where
i don't have to make a good decision i
just to find somebody more foolish than
myself
to buy it at a higher price and this
actually rolls nicely back to warren
buffett's
first rule of first two rules of
investing of not losing money
because if we follow these laws of
investing
well this is all geared to
not losing money it's all geared to i
don't care if we get
the best possible investment that we've
returned you know ten thousand percent
in
six months i care more that we don't
lose money
and the way you do that is staying
disciplined
staying patient and sticking with what
we know buffett says it all the time
stay within our own circle of competence
these laws if we follow these laws of
investing
that gets us there and that helps us
achieve his two primary rules of
investing now a logical next question
could be
how do we go about finding good
companies to invest in and how do we get
through
enough companies to be able to find the
great business that we want to buy and
hold
ideally forever and i actually did a
video where i go through
a fairly simple way of analyzing
multiple companies
maybe not at the same time but pretty
close to the same time
to see which companies could have
competitive advantages which companies
could be
well positioned to do well in the long
run so if you're curious perhaps that's
a good next video for you to watch i get
a link right here i've got a link in the
description below and thank you so much
for sticking with me all the way to the
end of the video
i really do appreciate it thank you and
i'll see in the next video