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hi i'm jimmy in this video we're looking at some of warren buffett's laws of investing so i've been going through and reading a bunch of different uh buffett books books about warren buffett is about his investing style and i was trying to summarize them into some color let's call it fundamental laws of investing that if we follow these we're more likely to be successful over the long run that's what this is so let's jump right in i'm sure the rules of investing that we've all heard warren buffett say is rule number one don't lose money rule number two don't forget rule one buffett has made these these two lines super famous i think many investors would look at those two rules and say yeah that sounds fantastic but i have no idea where to start so these laws are designed to get us to the point that we are less likely to lose money so our first law of investing is that we must know the risk of an investment the genuine risk the true risk what is the real risk of that investment and many times buffet has said in different letters of different speeches that he's given or different interviews that he's given that volatility and risk are not the same thing now i understand that volatility is often something like a standard deviation is often used in many different formulas and you it's a nice quantifiable number and people often associate it with risk even when i went to school to learn about this it was taught as this is the measure of risk but if you logic it out it's not terribly logical that just because the stock moves more it is somehow riskier it is very possible the stock drops volatility would increase but perhaps it is now less risky than it was before at a higher price now when warren buffett talks about what risk actually is and these are very broad definitions of risk well the first thing that he talks about is that the biggest risk is the risk of not knowing what we're doing and i think that this is very obvious and this is one of the reasons that many people are out trying to research companies or learn more about investing or taking courses or going to school or whatever it is it's to try to fill those knowledge gaps because it is very important that we have some idea what we're doing and the second part of this and probably the more fitting part of this is the risk of a permanent loss of capital and all this means is that when we go out and we buy a stock and perhaps we don't know that much about the underlying business or maybe we go and buy a stock option and either that company goes out of business or the stock drops a huge amount and then it gets bought out by somebody else so we have we're forced to sell it at that point either way what we end up with is we end up with a permanent loss of capital where we invested x we get back significantly less than that and generally this will happen from a mistake that we make outside of a company just committing straight up fraud that's tricky to defend against but if we overpay for a company and then the company drops in price and then that gets bought out by another company and they give us cash for our shares if we paid 50 a share stock drops down to 30 and a company gets bought out at let's say 35 we lost money that's a permanent loss of capital and that's on us for overpaying now of course that's an extreme example we might not be forced into selling the stock but we might perhaps we should sell the stock perhaps it was a poor investment and we just made a bad decision early on that leads us to the question of when do we sell a stock and this actually leads nicely into our second law of investing and this one is to make sure that we look at investing as if we are investing in a business not in a financial instrument and i think this is a crucial investing mindset to long-term successful investing now buffett has talked about many times he's talked about how he looks at the companies he buys as if he's buying businesses not stocks buying stock is just the way he goes about buying the actual business and we should do that exact same thing far too many investors look they go out and they buy a stock and feel and look at it as a trading tool something we might get out next week or next month or if the stock goes up 20 or down 20 well we should jump in and we should make a move and i think it's crucially important that if we are actually investing in a business well we don't look we're not always looking to make a move i think far too many times people are looking to make a move just because they can make a move they want to either lock in gains or they want to chase more profits instead of looking for the best business they can buy and buying it at a great price or even a good price and i think that this is a mistake one example of this is that personally i own shares of disney and disney when i first when i bought it well i had to ask myself is do i want to own a piece of this business do i want to own disney as a business and once i had done my research and i came to the conclusion that personally yes i wanted to own a piece of disney as a business well then i got to try to come up with a fair value for the company itself so i go ahead i do my analysis and i come up with okay here's what i think disney's the business is worth then you try to pay less than that and you got to be patient buffett has also said many times that the stock market is a it's a way to transfer money from the inpatient to the patient so it's crucial that we remain patient and wait for the business we really want to own at a good price now once we know the company and then we try to come up with what the what we think the company is worth ideally again we want to pay less than that but then when we comes bringing us back to when do we sell well buffett always says that his ideal holding period is forever but let's imagine that we can stick with that mindset we want to hold it forever but if we understand why we bought it and while we bought it at the price that we bought of that then what we're waiting for is a direction a directional change in the business perhaps the business two years from now 10 years from now whatever it is after we've owned the stock for a long time well the business the direction of the business change changes or maybe the prospects of the business change and we no longer like it well that's a very logical reason to sell it in fact i think that's more logical than waiting to then the stock is up 20 so i'm selling it now so going back to my personal disney example well i did a video a few months back where i looked at my where i did a video on my personal investment portfolio and in that video i talked about when i bought disney and at that time this is what the stock chart had looked like now i bought disney stock back here in this area now i didn't buy them at the best possible price the stock dropped all the way into the 80s i believe and i dropped mine i got a little bit trigger happy when it fell below 100 per share and i bought my shares there so i could have bought it about 10 lower but either way that happens but i was very happy with my price now when i did the video on the overall portfolio i got far more questions than i would have expected asking up here at this price if in the video i said i thought it was overvalued and i do i think up at 180 190 per share disney does seem somewhat overvalued and people would ask well if it's overvalued why not sell the shares and for me the answer is well first when i bought disney shares i want to own disney the business for the long term i think 5 10 20 years from now disney's going to be bigger and better than they are today so because i got it at such a good price i'm more than happy to sit here indefinitely and just wait and the other reason why i would hesitate to sell today is i once heard warren buffett say that you know he's owned coca-cola for like 40-something years why not sell all of his shares and take an enormous profit and as he pointed out why invite the taxman to the party now at that time i had owned my shares of disney for less than a year so if i sell them i have to pay short term capital gains tax what is that 20 30 depending on everybody's individual situation i'm giving up 30 let's say of the profits 25 whatever it is right off the top but now i'm sitting on this cash what am i going to do with it right now i think a lot of the stock market is overvalued i'm having trouble finding any really good undervalued businesses with that being said am i just going to sit in this cash because if i sell it and i sit on the cash well now inflation is chip chipping away at it to me there's very i don't have a logical reason why i would sell just because i could get a higher price for it today now if the underlying fundamentals of the business change and they start going against the reasons why i ultimately like the business well then i would certainly consider selling it maybe the stock is higher than it is today maybe it's lower but either way i'm i'm trying to pay attention solely to the fundamentals and pay less attention to whether or not i should sell because the quote is higher today that being said the next law of investing that we have is to keep saying no and this isn't just warren buffett's law of investing many famous investors have talked about how many deals they reject how many stocks as in the case of warren buffett how many stocks he goes through before he finally finds one that he jumps in and buys the ratio is enormous for the amount that he discards the amount that he says no to i think far too often investors start to they want to miss the boat they care more about missing gains than they care about avoiding losses and the key to great long-term investing is to wait for as warren buffett puts it wait for the perfect pitch wait for something that is almost a sure swing and we can get as many swings as we want the more research we do the more companies we look at the deeper of an understanding we get of different businesses the more opportunities that get presented to us and we get to decide when they are pressed right when they are priced wrong and we get to sit there and be very patient now in order to successfully pull off this patience is to be able to get over our very harmful desire to move in and out of positions just because we can successful investing long-term successful investing is rooting in finding solid businesses and buying them at good prices and hosing them for long periods of long period of time it's really that simple now this brings us to our next law of investing and that is this one's probably going to be a little controversial but that is that this time is never different now this is actually a throwback to a great book called this time is different and basically in the book what they do is they go back and they look at investing through many many many years and they explain they prove how things have shaken out very similar similarly each time and it's actually great read so if you're curious i'll leave a link to this book in the description below i'll leave amazon affiliate link now recognizing that it is it's never that different everybody i i've seen so many comments not everybody does it but a lot of people look at the situation and say oh my god we've never had electric vehicles before we've never had you know this new technology that is coming out and everything's so different now is it that different though i mean yes of course electric vehicles are a big change but there was a time we didn't have any vehicles you know the internet was invented the amount of gradual change that has happened even rapid change has been here and every time things revert to the mean it keeps happening over and over again but people i think by their nature most people are i think we're by and large somewhat short-sighted and the point of all that is that what we don't want to do is because there's some new technology or something amazing that is genuinely happening that doesn't mean we want to pay an obscene price to get involved in it it might be a great business but surely down the road competition will come new creations will come at some point all of today's technology will be old technology will be replaced by something new that is the way the world eventually goes so if we obscenely overpay for things today that we our returns are going to be far less impressive than if we were more disciplined in the long run so we really don't want to get stuck in this trap in believing that an investment which is perhaps way way overvalued today will become a good investment because it's going to become even more overvalued you know the greater fool the the whole greater fool theory where i don't have to make a good decision i just to find somebody more foolish than myself to buy it at a higher price and this actually rolls nicely back to warren buffett's first rule of first two rules of investing of not losing money because if we follow these laws of investing well this is all geared to not losing money it's all geared to i don't care if we get the best possible investment that we've returned you know ten thousand percent in six months i care more that we don't lose money and the way you do that is staying disciplined staying patient and sticking with what we know buffett says it all the time stay within our own circle of competence these laws if we follow these laws of investing that gets us there and that helps us achieve his two primary rules of investing now a logical next question could be how do we go about finding good companies to invest in and how do we get through enough companies to be able to find the great business that we want to buy and hold ideally forever and i actually did a video where i go through a fairly simple way of analyzing multiple companies maybe not at the same time but pretty close to the same time to see which companies could have competitive advantages which companies could be well positioned to do well in the long run so if you're curious perhaps that's a good next video for you to watch i get a link right here i've got a link in the description below and thank you so much for sticking with me all the way to the end of the video i really do appreciate it thank you and i'll see in the next video
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