Accumulating wealth through the stock market is achievable for anyone, regardless of age or savings. And I think Warren Buffett‘s number one rule can help any investor reach their financial goals.
The principle of capital preservation
The Oracle of Omaha is one of the greatest investors in history. And he lays out one basic rule (repeated) for investors to live by:
Rule number 1: Never lose money.
Rule number 2: Never forget rule number 1.
Admittedly, these words sound obvious and overly simplistic. But what Buffett is basically saying here is that investments should be considered as carefully as possible.
The stock market is about getting rich slowly, not quickly.
One share I’d avoid at all costs
For whatever reasons, markets now exhibit far more casino-like behaviour than they did when I was young.
Warren Buffett
At any given time, there will be highly speculative stocks that investors are piling into. The most obvious one I see today is Trump Media & Technology Group (NASDAQ: DJT).
This company, which merged with a special purpose acquisition company (SPAC) and began trading on 26 March, is affiliated with former president Donald Trump. It created the alt-tech social media platform Truth Social.
The share price has rocketed to $48, giving the firm a market cap of $6.6bn.
This seems absurd to me because the company posted a $58.2m net loss on revenue of just $4.1m last year. That puts the stock’s price-to-sales (P/S) multiple above 1,000. For context, a P/S of 10 is considered expensive.
Meanwhile, it’s unclear how many advertisers and daily active users will ever adopt Truth Social. My strong suspicion is — not enough to justify the valuation.
Of course, that’s not to say there couldn’t be more thumbs-up votes for this meme stock in the near term. Momentum can be a powerful force.
But as Buffett is also fond of saying: “In the short run the market acts as a voting machine; in the long run it becomes a weighing machine.”
From $48 today, I think the stock will be weighed very unfavourably over time. I’m staying well away.
One stock I like
In contrast to this, I would invest in JD Sports Fashion (LSE: JD). The share price has risen 10.7% in the past month but remains 24% lower than one year ago.
The problem has been slowing sales due to the tough economic environment. There’s a risk this could worsen, impacting sales and profits. The higher cost of living remains a problem for many consumers.
However, in the 53 weeks to 3 February, JD said it outperformed the wider sportswear market, achieving like-for-like sales growth of 4.2% on a constant currency basis. Organic growth was 8.4%.
Meanwhile, it opened 215 new stores during the year, bringing the group’s total to around 3,500 worldwide. And management expects full-year profits of £915m-£935m.
Looking ahead, we’ve got a summer of sport that includes the Paris Olympics and Euro 2024. This should boost sales.
Plus, JD has a close partnership with Nike, which has just announced a strategic shift to invest more in its wholesale channel. This is also likely to benefit the retailer.
Finally, the stock is cheap at just 11 times this year’s forecast earnings. I’d buy this FTSE 100 stock if I had some spare cash.
