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Warren Buffett Breaks His Own #1 Rule and Why It Is Okay

Tell me if you have heard this Warren Buffett quote before:

Rule #1: Never lose money

Rule #2: Don’t forget rule #1

The pair of rules catches attention. After all, it is rather witty. But can Buffett really follow them? The evidence says that even the Oracle of Omaha has lost money before in some of his investments. In a CNBC interview last year, Buffett said:

“We’ve owned stocks that we’ve lost money in

If I’m wrong, you sell them out and take a big loss. We’ve done that on a few occasions with stocks and bonds over the years.”

So, why does Buffett put up rules that even he can’t keep?

Breaking the rules

There are clues from the same interview. Here’s what Buffett also said:

“What you pay for a stock doesn’t mean anything. What means something is where the company’s going to be in five to 10 years.”

In essence, Buffett is more interested to know where a business will be in five to 10 years’ time. Stock prices may move up and down over the short term, but if Buffett is right about the long term future of a business he is buying, then he stands to gain from the stock appreciation that will likely follow.

But, it is hard to be always right about things that will happen over a timeframe measured in years or decades.

For instance, Apple’s iPhone was introduced less than 10 years ago. (Can you believe it?) In the time between then and now, smartphones have reached a penetration rate of over 100% in Singapore (according to an Ericsson report).

Smartphones have, in turn, provided the platform for apps such as Grab and Uber that are proving to be an important alternative transportation service for commuters to taxi incumbents such as ComfortDelGro Corporation Ltd  (SGX: C52). It would be hard to foresee similar sequences unfolding in the next decade.

A Foolish interpretation

So, perhaps, the best way to interpret Buffett’s Rule #1 is to consider what may go wrong for a business you’re looking at. In the spirit of not losing money, investors should consider everything that could go wrong with a business, and weigh the risks with the potential rewards before investing in it.

Like Buffett, we will not be perfect in terms of avoiding losses. But limiting losses could well be a good goal.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.The Motley Fool Singapore has recommended shares of Apple. Motley Fool Singapore contributor Chin Hui Leong owns shares of Apple.