I’ve just met Warren Buffett’s first rule of investing. Here are 3 ways I did it

Harvey Jones has surprised himself by living up to Warren Buffett’s most important investment rule. But is his success down to luck or judgement?

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Buffett at the BRK AGM

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Billionaire investor Warren Buffett famously said: “The first rule of an investment is don’t lose money. And the second rule is don’t forget the first rule.” Being honest, I’ve never quite got it.

Anybody who buys individual stocks surely has to accept they’ll lose money at some point. Nobody – not even Buffett – can deliver a 100% strike rate.

He still has an important point though. Making money from investing only gets harder if you rack up losses. So I was pleasantly surprised to look at my Self-Invested Personal Pension (SIPP), which I started populating a year ago.

Winners and losers

My SIPP contains 25 different investments. The vast majority are FTSE 100 blue-chips, plus a handful of small- and medium-sized UK companies. And here’s the thing. Only four have ‘lost’ money so far. The remaining 21 are all in the black.

I reckon that’s a pretty decent hit rate. But there’s something else. My four fallers have dropped by only a tiny amount. Phoenix Group Holdings is down 4.34%, Diageo 1.81%, GSK (LSE: GSK) 1.68% and the India Capital Growth Investment Trust 0.97%.

They’re among my most recent purchases too. I only bought pharmaceutical group GSK on 4 March. That’s less than two months ago, which is no timescale by which to judge any stock.

I picked GSK because it looked cheap, trading at 10 times earnings, after a bumpy few years for its shares. I knew the company was in turnaround mode, as CEO Emma Walmsley battled to boost its drugs pipeline, and I also knew it wasn’t quite there yet. 

Like all of my stock purchases, I’m willing to give GSK five years or more to prove it’s worth. It’s delivered a string of successful trials lately, but developing new drugs is a tricky process, and I’m not expecting instant glory from this one. However, I don’t expect to lose money on GSK, over time.

Something else encourages me. My top four performers have made a lot more than my bottom four lost.

Private equity specialist 3i Group is my biggest success, up 40.79% since I started building my stake last August. Costain Group (37.68%), Just Group (25.53%) and Lloyds Banking Group (21.08%) have also done well.

It may not last, of course

I’m no Buffett, so what did I do right? I’ve come up with three answers.

I didn’t take too many chances. I thought I had a relatively high-risk tolerance but when it came to it, I didn’t. None of my stock picks were likely to shoot the lights out. While some have been volatile – Glencore was down 20% at one point but has since recovered – I did my best to follow Buffett rule number one.

I targeted cheap stocks. Instead of chasing momentum, I look for cheap, out-of-favour stocks trading at low valuations of around six or seven times earnings. This hopefully gives them more scope to grow and reduces downside risk.

I got my timing right. Inevitably, luck comes into it. I’m writing this with the FTSE 100 at an all-time high. That helps. I’m not getting carried away with my early success.

Overall, I’m up around 15% in a year. A couple of big losers would have knocked a hole in that. So Buffett’s rule holds good. Now let’s hope my luck holds.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has positions in 3i Group Plc, Costain Group Plc, Diageo Plc, GSK, Just Group Plc, Lloyds Banking Group Plc, and Phoenix Group Plc. The Motley Fool UK has recommended Diageo Plc, GSK, and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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