Ignore Warren Buffett’s Rule №1 and You Will End Up Broke

These Terrible Things Will Happen If We Don’t Listen To The “Sage of Omaha”.

Warren Buffett is arguably the greatest investor of all time. Over the years, he has shared much of his wisdom, including some of his personal rules for becoming financially successful.

In this article, we will explore what happens when we don’t follow his teachings. In particular, his №1 rule…

Photo by Mark Duffel on Unsplash

Rule №1

Buffett’s rule №1 is very easy to remember:

“Never lose money.”

To make sure we deeply understand the importance of the above, Warren Buffett continues with his rule №2:

“Don’t forget rule №1”.

As simple as that.

It isn’t about avoiding all losses at any cost. Even he has made bad investments. What this rule really emphasizes is capital preservation.

Protecting our money should always come before chasing returns. It’s a mindset that prioritizes caution over greed and patience over impulse.

We shouldn’t try to maximize our returns, but to minimize our losses.

Losing money doesn’t just hurt in the short term. It disrupts compounding, sets us back, and makes future growth harder.

In investing, the damage from losses is disproportionately larger than the gain from wins.

Losses Have More Influence than Gains

Imagine a stock, XYZ, trading at $100. Every other day, it gains 1%, and on the days in between, it loses 1%, rising and falling by the same percentage in an alternating pattern:

Image by Mind in Progress.

Our intuition says that the stock will always trade at around $100. Seems obvious…

This is not what happens. Losses have a greater impact on the price than gains.

Therefore, the price will fall, fall, and fall…

If instead of a 1% change, the stock goes up/down by 5%, the stock will fall even faster!

This is illustrated in the figure below.

Image by Mind in Progress.

This happens because percentage gains and losses aren’t symmetrical: recovering from a loss requires a larger percentage gain than the size of the drop. It’s like sliding down a hill and trying to climb back up. Going down is fast and easy. Climbing back up takes a lot more energy and effort.

The next figure shows the relationship between a loss and the gain required to recover. We should never forget this.

Image by Mind in Progress.

We lost 20% of our account? we’ll need a 25% gain just to get back to where we started.

We took a 50% hit? Now we need a 100% return — doubling our money — to recover.

Down 80%? We’ll need a staggering 400% gain just to break even!

One big loss can happen any time, but to recover could take years or even decades…

Psychology of Losing

This is bad enough, but there is maybe a greater risk when losing money: psychological damage.

We can tell ourselves whatever we want, but the truth is, we won’t stay indifferent when we lose money. We’ll question our decisions. We’ll regret our actions. We’ll become fearful.

The worst-case scenario will start to seem just around the corner. Frustration, stress, and panic will take over.

We may even start wondering whether we should quit trading altogether.

We will probably make poor decisions, and we may never forgive ourselves.

It’s just not worth it.

Final Thoughts

Protecting our capital is protecting our future.

Losses don’t just cost money, they cost time, energy, and peace of mind. Buffett’s Rule №1 is simple, but its wisdom is deep:

Our first job isn’t to grow fast, it’s to survive!

It’s much easier to build wealth when we’re not constantly digging ourselves out of a hole.

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