The first rule of investing

“The first rule of investing is don't lose money; the second rule is don't forget Rule No. 1.” - Warren Buffet

When I first read this quote, I thought that Warren Buffet was crazy. Conventional wisdom tells says that the only way to get big returns like is to take big risks. I am determined to make the biggest gains possible, and Buffet is encouraging me to take the boring conservative route. Nope, I am in it to make it big

However this recent bear market woke me up and I now understand the full value of Buffet's words.

The first thing an investor must master is the art of not losing money. Most investors have this concept backwards, and only focus on the possible gains you can make Learning not to lose money sounds boring, and we want to make the big bucks when investing, but this is THE fundamental skill that you must have.

Now here is the secret: Once you are able to accurately look for opportunities that won't lose you money, you can find that stocks where the risk/reward ratio that are mispriced by the market. There are opportunities out there where you can get reap big rewards, while taking little risks if you follow Buffet's #1 rule. This is how he and many other great investors made their billions.

Conventional wisdom is just dangerous in this case. Its belief that stocks are accurately priced justifies the need to take excess risks to make excess returns. In reality taking large risks, will more than likely lose you money in the end. Just remember that if you make a 50% loss, you have to make a 100% gain to make it up, and you will see why.

While the main focus of my blog is on value investing, I believe this rule is important to all forms of trading. I bet if you stop worrying about chasing gains, and focus more on not losing money, you will be a more successful investor/trader.