[Investment Maxims Part 9] The true meaning of “Never lose money.” The ultimate question Buffett posed to beginners

Hello, this is Neo! This is the 9th installment of the “Capitalist Mindset Taught by a Former Public Company Owner” series, a sub-series where we learn the philosophy of a capitalist from the words of great investors who have left their mark on history.

This time, we look at a very famous maxim from the Oracle of Omaha, Warren Buffett.

If you heard this and thought, “So it really is important not to let your investment drop by even a single yen. I guess a fixed-term deposit is the safest,” or “The stock price has dropped a little, so I should sell and run before the loss gets bigger,” then unfortunately, you have completely misinterpreted Buffett’s message.

1. The fatal misunderstanding of fearing “unrealized losses (negative balance)”

The more inexperienced an investor is, the more they fear seeing their brokerage app screen turn red (negative). This is because they interpret “never lose money” as “the number on the screen must not drop even one yen below the price at which I bought it.”

• The Capitalist Perspective: We business owners clearly distinguish between the value of a business and “temporary price fluctuations.” For example, suppose you bought a high-quality apartment building for 100 million yen. If the appraisal value drops to 90 million yen the following month due to a cooling real estate market, you wouldn’t panic and sell it off for 90 million yen if it continues to generate full occupancy and rental income (profit) every month, would you? A negative number on the screen (unrealized loss) is not a loss. It is merely “price fluctuation (volatility).” Misinterpreting this as “having lost money” and selling in a panic is the greatest taboo in investing.

2. It is “you yourself,” not the market, who realizes the loss

The true meaning of Buffett’s “never lose money” is “do not suffer a fatal injury (permanent impairment of capital) from which you cannot recover.”

Putting all your assets into a single cryptocurrency and having its value go to zero, or being unable to withstand a stock market crash and pressing the “sell” button at the very bottom—these are all “real losses” that are irrecoverable.

• How to follow “Rule No. 1” in index investing: The “All Country” or “S&P 500” funds we practice are diversified across high-quality companies around the world, so it is physically impossible for their value to go to zero (unless the entire global economy goes bankrupt). In other words, there is only one time you will suffer a “real loss” in index investing.The moment you succumb to fear during a crash and press the sell button with your own hands, “realizing the loss.”.

Editorial (Neo) Summary: The ultimate defense of “doing nothing” during a crash

What we must do to “never lose money” is not to predict the market and buy and sell with god-like timing.

“No matter how much the market crashes and the screen turns bright red, never sell (do not realize the loss).”

That is all there is to it. Temporary unrealized losses are just “small noise (a momentary crouch)” in the long-term growth of capitalism over 10 or 20 years.

When stock prices around the world crash and the media stirs up panic about the “return of the Great Depression,” remember these words from Buffett. The strongest action you can take to follow Rule No. 1 is to quietly close your brokerage app, forget about your investments, and simply return to your main business (daily life).

[*Please read: Disclaimer regarding investment] The information provided in this article and future installments is for learning and reference purposes based on my personal experience and views, and does not recommend the buying or selling of any specific product. Financial markets are constantly fluctuating, and there is a risk of losing your principal. Please make final investment decisions based on your own judgment and responsibility.Invest at your own risk.