Despite having a net worth in excess of $120bn, Warren Buffett‘s teachings are applicable to all investors, even those of us starting with nothing. Let’s take a closer look at his golden rule and how we can put it into action.
No risky bets
Buffett’s headline rule is “don’t lose money” and his second rule is “don’t forget rule one”. This might sound obvious. Of course, it is. But it’s important to look at the message within. It’s about protection of capital, and that’s vitally important if we’re investing a proportion of our salary in lieu of starting capital.
So how can we go about ‘not losing money’? Well, simply it means we need to make sensible investments that reduce our chances of losing. And often this requires us to do our research.
This may mean avoiding meme stocks — a stock that’s volatile, driven by online hype, often disconnected from fundamental value, speculative trading — and focusing on strong investment credentials.
One way to do this is looking at data. This should be fundamental in investment decision-making as it helps us understand whether a company is undervalued or overvalued.
This could mean investing £200 of my salary into stocks each month, and by being data-driven, I may be able to minimise my losers and select more winners. Here are two data-driven examples.
Example 1
Super Micro Computer (NASDAQ:SMCI) stock is up 846% over the past 12 months. But it’s not a meme stock. This company is central to the AI-revolution, providing high-performance, application-optimised solutions for semiconductors.
These essentially comprise a one-stop-shop of solutions for microchips, with proprietary-cooling technology, allowing AI-centred semiconductors to operate at peak efficiency.
And despite surging, the company still has a price-to-earnings-to-growth (PEG) ratio under one. It currently stands at 0.98, inferring the stock is undervalued by 2%.
However, I expect this PEG ratio will fall soon. That’s not because I’m expecting the share price to fall, but because analysts are continually revising their expectations for the company’s earnings upwards.
Sure, other companies will become more competitive in this space as time goes on. However, Super Micro definitely looks dominant for now, and demand for its services is surging.
Example 2
Celestica (NYSE:CLS) is another booming stock, but it’s one which also has positive metrics. The company currently trades at 12.8 times forward earnings and it has a PEG ratio of 0.8. Once again, this infers that the stock still has further to rise.
The firm provides end-to-end high-tech supply chain solutions and product manufacturing services. The recent surge has been engendered by racing demand for its hyperscale services which support AI applications.
As with Super Micro, it’s a leader in a developing space. So there could be more competition to come. However, it benefits from a host of partnerships with big data companies and there’s no sign of the AI boom slowing.
