Warren Buffett’s first rule of investing is simple: Never lose money. His second is equally straightforward: Never forget rule No. 1. Rules like this really come to the fore when we’re in times of crisis like Brexit. If we crash out of the EU with no deal, our economy could be in for a hammering.
Why is Buffett’s first rule so important at such times? Crises can present some of the most likely scenarios for losing money. But there’s also what I see as a simple fact — loss-avoiding rules are the best rules for long-term investment at any time, good or bad.
As an example, during the final weeks of the demise of Thomas Cook, I saw two distinct schools of thought emerging. One approach was to see a recovery opportunity, based on how much money you might gain by buying the shares when they were down. It was essentially based just on the share price itself, and there’s a strong emotive feeling shared by many that what goes down, must come back up. When Thomas Cook shares were trading at 6p, for example, they’d lost a whopping 130p since the price slide set in.
But you wouldn’t need anything like a 130p recovery to make a mint. Just a 6p gain would double your money. Even a five-bagger would only need a 24p rise. And after a 130p fall, gains of pennies like that can instinctively seem very plausible.
Now, the “Never lose money” Buffett follower would, instead, be looking at it entirely differently. Rather than asking “how easy could I double my money?” I’d be thinking “what’s the biggest loss I could suffer?” That, obviously, was 100%. And you didn’t need hindsight, as we knew for a fact the debt-ridden company was fighting for its very survival.
But back (as ever) to Brexit. One of the effects of Brexit uncertainty is, perhaps ironically, that a lot of investors seem to be migrating away from whatever is their usual strategy and embracing Buffett’s advice.
The result is a so-called flight to safety, as people seek out the kinds of shares that are least likely to fall as a result of Brexit troubles. Investors are abandoning UK-centric companies that are most at risk from a UK recession, and instead are going for top international companies paying safe dividends.
But the thing is, I reckon top international companies paying safe dividends are the best investments there are for the long term anyway. They’re the kind of companies that prosper through both good times and bad.
I reckon we’d all be a lot better off if we always invested as though a no-deal Brexit was around the corner, and always bought shares in companies least likely to lose us money rather than looking for the next multi-bagger.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.