You might think that when Warrent Buffet says "Rule One: Never Lose Money. Rule Two: Never Forget Rule One." it means that he makes money on every trade. He doesn’t. At least, not when it came to BoA:
Warren Buffett’s Berkshire Hathaway Inc. sold its stake in Bank of America Corp., ending an investment that spanned three and a half years in which the lender’s stock lost more than two-thirds of its value.
Buffett’s firm had no shares in the Charlotte, North Carolina-based bank at the end of 2010, compared with 5 million shares three months earlier, Berkshire said late yesterday in a regulatory filing that lists the company’s U.S. stockholdings.
Berkshire, where Buffett serves as chief executive officer and head of investments, entered the Bank of America stake with the purchase of 8.7 million shares in the second quarter of 2007.
This is why you shouldn’t follow what people say, follow what they do. Buffett probably never meant hold on till you make money on everything – he’s lost money in US Airways and a number of other purchases earlier. I’m sure he didn’t intend to lose money (who does?) but it doesn’t mean he’ll follow this rule forever. I wrote about this in Losses and Endowments:
Warren Buffet has two rules: 1) Do not lose money and 2) Don’t forget rule #1. It would be entirely stupid to believe he doesn’t lose money. Rules, after all, are meant to be broken, especially when your choice is to break it and lose money, or to stand by it and lose even more money.
Some might think I’m just taking Buffett’s trip – but I’m not. He’s done exactly like he should have – cut his losses and walked when it seemed it would just get worse.
There are people who mail in Buffett-isms as if they were written in stone. I’m just saying that it’s perfectly okay to violate those rules; the thinking behind investments has to be to avoid losses on average. That is, you come out winning if you make more on your winners and lose less on your losers.
A better meta rule, perhaps, and I’m not the first one to say this – is 1) Have great sounding rules and 2) know when to break them.
