O'Reilly logo

Creating a Portfolio Like Warren Buffett: A High-Return Investment Strategy by Jeeva Ramaswamy

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 4

Permanent Loss of Capital

Warren Buffett’s first rules of investing are:

“Rule 1: Never lose money

Rule 2: Never forget Rule No: 1”1

An investor’s main task is to avoid permanent capital loss. For example, if you have a $100,000 portfolio and $50,000 in permanent capital loss, this means you lost 50 percent of your capital. To make it even, you have to earn $50,000 in investment gain from the available $50,000 capital. That means you need to generate a 100 percent return, which is double the percentage points of what you lost. If you calculate the compound return for a long time into the future, the numbers will be staggering.

In the following scenarios, consider you are generating a 15 percent compound return for the next 20 years.

Scenario 1

You did not lose any capital in the first year. You generate a 15 percent compound annual return for the next 20 years. By the end of the twentieth year, your money would be worth as shown here (you have to use a formula like the one here to calculate the future value).

c04ue001

c04ue002

c04ue003

Scenario 2

In this scenario, you lost $50,000 in your first year of investing. That means you have only $50,000 capital available when you start to invest next year. ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required