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Warren Buffett is widely regarded as the greatest stock market investor of all time. If you had invested $500 in this guru in 1965, that money would have been worth about $22 million at the end of last year.
Want to know what Mr. Buffett’s first rule of investing is? Read on and I’ll tell you.
simple rules
Given Buffett’s incredible level of success in the stock market, you might expect his first rule of investing to be complicated. But that’s not the case.
“The first rule of investing is don’t lose,” he says. It’s that simple.
Rule #1: Never lose money. Rule #2: Never forget rule #1.
warren buffett
Risk management is the key to success
You’ll probably agree that this is a little strange. This is because everyone can lose money when investing.
Buffett often loses large sums of money on certain stocks. For example, he lost hundreds of millions of dollars in Tesco stock when his investment in the company backfired.
But I understand what he’s trying to say. Risk management is very important if you want to be a successful investor.
If you want to generate large profits in the long term, it is important to minimize large losses. After all, if the stock price drops 50%, you would need to generate 100% profit to break even. If it goes down 80%, you need a 400% return to get your money back.
Follow Buffett’s Law
In terms of strategies that help investors follow Buffett’s laws, there are several strategies worth highlighting.
One is to spread your capital across many different stocks. No one makes every stock selection correctly. But by taking a diversified approach to investing and buying a portfolio of 20 or more stocks, you can significantly increase your chances of success in the stock market. Even if a small number of stocks perform very poorly, the basket of stocks can perform well over time.
Another is to pay attention to stock valuations. This doesn’t necessarily mean buying the cheapest stocks out there (Buffett says it’s better to buy quality stocks at average prices than average stocks at bargain prices). But that means focusing on stocks that have reasonable valuations and are unlikely to lose 80% of their value in the future.
Which stocks should we pay attention to now?
One UK stock that I think is trading at a very reasonable valuation today is Coca-Cola HBC (LSE: CCH). The company is a major bottling partner for The Coca-Cola Company (one of Buffett’s largest holding companies).
The stock currently trades at a forward price-to-earnings ratio (P/E) of 13.1 times using next year’s earnings estimates. All things considered, I think this is a pretty low rating.
This is a business with long-term growth potential and defensive capabilities. It is also a company that boasts an excellent track record of increasing dividends (more than 10 consecutive dividend increases).
Of course, this stock also has risks. Changing consumer tastes and preferences (i.e. a shift towards healthier drinks) is one of them. Economic and geopolitical turmoil is another factor (some consumers are currently boycotting US brands).
But at today’s valuation, I think there’s a lot to like about this stock. I think it’s worth considering as a diversified portfolio.
