The safety of the principal should be your main concern right now

Are you listening to the advice of the world’s greatest investors? More importantly, are you following that advice?

If it isn’t already clear, the latest swing banking failures show that risky bets are capable of producing disastrous results. Protecting your money should be first and foremost on your mind.

So with that in mind, I’ll ask again. Are you listening to and applying the strongest advice from the world’s most successful investor?

Salad Oil Swindle of 1963

Do you remember the salad oil scandal? I do well not really. But I was born that year.

In the same week as JFK’s assassination, the investment world was rocked by the revelation that they had been duped by a swindler who claimed to have a corner on the nation’s soybean market. American Express was the primary financial backer of this scoundrel, and their stock plummeted over 40%.

Warren Buffett, 33, gave a one-sided review of AMEX’s history and overall business and saw it as a temporary blip. He judged them as a solid corporation that made a big mistake.

He also knew that roughly 99% of Wall Street investors trade on emotion and cannot be trusted to properly value this 100+-year staple of the American economy.

In the face of overwhelmingly negative public sentiment, Buffett loaded up on $20 million of AMEX stock. The stock soon doubled in value. Buffett chalked up one of his first big public victories.

dot-com bubble

It was 1999, and Buffett had not yet turned 69. But some called him an old fool. Has washed away Some friends at his annual Idaho billionaire convention whispered that he must be getting old.

But that hasn’t stopped Buffett from boldly warning his friends and detractors against the epic run-up in tech stocks that has propelled non-income-producing tech companies to dizzying heights.

Buffett considered it speculation. Buffett was later credited with saying, “I can’t predict where technology will be in ten years. I’d love to buy Wrigley because I know how people will be chewing gum in a decade.”

Of course, we all know that Buffett was proven right again when the tech bubble burst and millions of investors lost a total of $5 trillion in the collapse.

crypto bubble

Buffett, 92, has been a prominent critic of bitcoin and the entire cryptocurrency sector. They told CNBC in 2014“Over the next 50 years you will be much better off owning a productive asset than owning a piece of paper or bitcoin.”

Of course, we don’t know where the crypto saga will end. But bitcoin is clearly not the smooth sail the $100k folks predicted this year.

I’m not saying that Buffett is always right. He has made a lot of mistakes by his own admission. But Berkshire Hathaway Must Have a Reason can lose more than 99% For what it’s worth and still beat the S&P 500 over the same time frame. think about that

So if you’re only going to follow one of Buffett’s principles, it probably pays to start with the first one.

Buffett’s Most Important Advice to Investors

You’ve probably heard of Buffett’s #1 rule for investing: “Rule number one, never lose money. Rule number two, don’t forget rule number one.

Surest Path to Wealth: Start with Safety. Lots of investors are looking for safety after last week’s banking failure.

This is nothing new in my firm and in the circles in which I travel. We’ve been having internal and external discussions in boom times and downturns alike. (You can read the year my big pockets And company blog post to confirm it.)

Like many seasoned commercial real estate investors, we’ve seen plenty of highs – and just as many lows. As a result, the people we run with (operators and investors) support these priorities in this order:

1. principal’s security
2. estimated cash flow
3. appreciating the pulse of the market
4. tax deferrals

Syndicators and fund managers with these priorities should not fear a recession, rising interest rates, rising cap rates, and more. Their investors must be sleeping like babies amid all the questions and fear that may soon give way to panic in some sectors.

If you’re not sleeping like a baby in current uncertainty, go back through this short list and ask yourself whether you prioritized these issues when you first made your current investment. did you do?

If not, don’t be discouraged. Mistakes are probably the best opportunity to learn what to do better next time. This could be the “break” you’ve been looking for in creating and maintaining a multi-generational asset.

I’m not flipping here. As host of the How to Lose Money podcast, I interviewed 238 successful entrepreneurs and investors. Their path to success was littered with mistakes, loss and pain. And most say they wouldn’t trade these for the world. Most are running businesses and investing differently now, building on the success by not doing what got them into trouble in the past.

Speaking of our mistakes and learning from Warren Buffett, here is a quote from Warren Buffett’s longtime investing partner, Charlie Munger:

“I like people to admit that they were totally stupid horse asses. I know I’ll do better if I rub my nose at my mistakes. It’s a wonderful trick to learn from.”

Well said, Mr. Munger.

Maths on Principal’s Security

Did you know that there is math to prove security is Buffett’s top priority? At first glance, this doesn’t make sense.

Why would America’s two most security-minded investors also be America’s most successful?

I mean, when I think of security, it’s easy to picture these:

• Old strollers with stacks of cash under their mattresses.
• A conservative financial planner is afraid to invest in anything other than US Treasuries.
• Dave Ramsey and his repulsion with all kinds of leverage (and everyone who uses it).

Here’s the logic and math behind this important theory. It’s really quite simple, and I’ll use 50% returns to make the math more clear.

It is widely believed that risk is proportional to return. Lower risk leads to lower returns. Hence higher risk leads to higher returns.

Correct?

Wrong.

Higher risk leads to the potential for higher returns – the potential for higher losses, including the loss of all your investments.

So let’s say you took some risk. You expected a higher return, say 50%.

If you make 50% profit in a reasonable time frame, you should be celebrating. It’s a great comeback.

But the whole concept of risk means that the future is uncertain. Suppose your investment produces a 50% loss instead of the anticipated 50% gain that you had hoped for. What is the effect of such damage?

A loss of 50% will hurt you while a gain of 50% will not help you.

Why?

Because it significantly lowers your starting point. And it takes a devastating emotional toll that may tempt you to make poor investment decisions in the future.

If you lose 50% of your principal, you’ll need to double your money to get back where you started, and this may prompt you to take on even more risk to make up for lost ground. This can lead to a death spiral that consumes all of your principal and leaves you with nothing. It happens all the time.

Therefore, large investments can be seen more as a matter of loss aversion than profit making. Warren Buffett and his partner Charlie Munger have built a fortune by working on this principle.

So what does this have to do with you or yours or your investments? Everything. do the math.

While it’s wonderful to admire these investment giants and create a plan to emulate them yourself, it’s harder than it looks. It means being patient. It means to tolerate ridicule. This means holding on to investments when everything inside you is screaming to sell. This can mean being greedy when others are fearful and fearful when others are greedy.

Fear and greed (aka market cycles) are as certain as death and taxes. Just because the last major financial crisis ended a decade ago, doesn’t mean we’re cured of the fear contagion.

Predicting when and how bad (or good) these market cycles are is a fool’s game. But Buffett says it’s simpler than that. Act appropriately only when the time is right.

You can’t strike out without swinging

Warren Buffett is a big fan of baseball. He compares investing in standing at the plate with a pitcher throwing a baseball at you, tempting you to swing. In baseball, you can strike out by swinging and missing three times. Or when three good pitches pass through the strike zone, you can strike without swinging at all.

In investing, you can “swing” at bad investments. But Buffett reminds us that, unlike in baseball, you can’t strike out with a bat over your shoulder. It’s okay to invest in not swinging at a thousand great pitches.

This is part of Buffett’s reasoning for keeping more than $100 billion in reserves over the past several years. While other investors find a good deal under every rock, Buffett and Munger say great deals are nearly impossible to find. The odds are so good that it is difficult to lose money.

cost of missed opportunities

As he ages (now 98), Munger is talking more about losses due to opportunity cost. He says the opportunities he and Warren missed over several decades cost him and his shareholders billions.

For example, he regrets not investing in Walmart. And there are dozens of other missed opportunities that Charlie and Warren admit have made their shareholders huge profits.

So what does this have to do with you?

There are going to be quite a few opportunities to grab profitable deals in the coming years. I’m already hearing about multifamily, and other deals acquired over the years that are now in danger of going back to the bank, costing investors some or all of their equity. scott trench recently wrote about,

We’re quoting Warren Buffett and warning investors about the day the tide turns. It looks like that day is now upon us, and the skinny dippers are already coming to the fore. (I sincerely wish them all the best, and I hope they escape without harm!)

But this painful (for some) recession could actually be your opportunity. The opportunity you’ve waited for to put to work the wealth you’ve acquired through BiggerPockets and the relationships you’ve acquired through BiggerPockets and elsewhere has gone unappreciated by impulsive buying and speculation this past decade.

Buffett and Munger have often said that the acquisition price is one of the most important aspects of any deal. You may have heard the oft-quoted saying, “You make money when you buy.”

final thoughts

If this coming few years are similar to the last economic downturn, you may be able to get deals at 50% or more of the previous acquisition price. This opportunity is often available through lenders who repossess assets and do not wish to hold and operate them.

Buffett’s friend and fellow billionaire Howard Marks bought billions in financial assets in late 2008 when the market was in a meltdown. worst time.

Am I predicting the worst of times? No, but we can all see cracks in the real estate ice right now. Those who have grit and courage, and access to capital, may find game-changing opportunities in the years to come. would that be you?

Whether it is you or not, I want to immediately remind you of the importance of ranking the principals’ safety as your top priority. You might miss out on some tempting deals, but the math proves this Buffettsqually powerful path to riches.

Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.