I've shared this old Buffett interview before (from 1985 I believe, and one of Buffett's first), but it recently turned up again in my YouTube feed, and it's such a great interview I thought it worth sharing again & offering a few quick thoughts (below).
One of the first things Buffett says is rule #1, don't lose, and rule #2, don't forget rule #1. This is a quote I've heard many times over the decades, but only fairly recently have I begun to really fully appreciate how fundamentally important this dictum is.
Every cycle, Buffett is widely criticized for "missing winners". This cycle, it's for "missing Amazon" etc. But that misses an important point: Buffett's approach/value investing is fundamentally about *avoiding the risk of overpaying* at all costs.
Buffett has long understood that if you avoid overpaying, this virtually guarantees you long term investment success with minimal risk. You don't to pick huge winners. You need to have the discipline to avoid chasing high returns and overpaying, which is most investors' downfall.
This defensively-oriented strategy that is virtually guaranteed to work well over the long term is not enough for most people. Greed temps people to want more, and faster. There is always a temptation to chase fashions & growth. That's why not forgetting rule #1 is so important.
What I also love about this video is that the interviewer asks "So you don't even own IBM?". In 1985, not owning IBM was like not owning Amazon & it's ilk today. It had done well and everyone owned it. It was a sure winner in the coming computer age.
Not owning IBM seemed foolish. Sure, it might not be cheap, but IBM had *never been cheap* and those that hadn't owned it had missed out on big profits. It seemed like big profits were being needlessly left on the table. Why stick so rigorously to old-fashioned principles?
The answer is because Buffett adheres to rule #2, and doesn't forget rule #1. He acknowledged it was a "wonderful company". But unlike most investors, Buffett is able to define the realistic limits of his foresight, whereas most investors are far too overconfident in that regard.
Times change, and as we have seen, IBM lost its towering position. There will be a time in the future when many of today's invincibles" suffer similar fates. Buffett is too modest when he says he doesn't understand these stocks. He understands them all too well.
He knew that the prices being paid required not just a positive outlook for the next 5yrs, but for the next 20-30yrs+, and didn't feel capable of having confidence in the outlook that far out. Other investors did, but subsequent events proved that confidence to be misplaced.
Buffett's experience & success shows just how far you can go with your investment results if you are able to avoid the temptation to chase growth/hype and the FOMO many investors suffer from, and instead simply remember rules #1-2 and scrupulously avoid the risk of overpayment.
Most investors try to pick winners, and worry more about missing out on profits than minimizing the risk of overpaying and incurring losses. Buffett focuses on *not picking losers*. And as his results show, if you invest for a long time and avoid overpayment, you'll do very well.
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