WARREN BUFFET'S TWO INVESTING RULES

Warren Buffett is known for having two investing rules. Rule number one is “Don’t Lose Money.” Rule #2 is “Don’t Forget Rule #1.” This philosophy drives our investing system as well.

If you’re at or near retirement age, these rules take on more importance. When we’re older, we have less time left for the markets to recover. Big and long downturns can have a significant impact on retirement plans for people already in retirement.

Big and long downturns can cause damage to long-term rates of return for young people as well. Let’s look at the annual stock market returns (S&P 500) for the five-year period from 2007 through 2011. If an investor had $100,000 at the beginning of 2007 in an S&P index fund, they would have had only $88,618 five years later due to the huge decline (-38.5%) in 2008. Those five years of performance produced a fund that was probably well below what this person was assuming for their long-term financial plan at the time. Those results change the retirement calculations significantly.

But let’s say that you had a way to cut the losses of 2008 in half. Rather than losing 38.5% in 2008, let’s say you lost 19.3% instead. Rather than finishing the period with only $88,618, you would have ended up with $116,284 at the end of 2011 (or 31% more).

A loss of 19.3% is still significant, but at the end of the five years you would have probably still been close to your financial targets. This is a great illustration of Warren Buffett’s rules.

Our Beyond Buy & Hold system is designed specifically for the investing challenge of bear market collapses. The back test of our model in these five years produces an even better result. Our model would have generated a balance of $165,911 at the end of 2011, almost double what the market delivered ($89K). This is because our automated trading system would have produced an 8.7% gain in 2008 compared to the 38.5% loss.

Big losses in bear markets are the main reason why “Buy & Hold” is such a mediocre investing strategy. Buy & Hold proponents tell us to just ride out these bear market storms despite the fact that your investments can lose 30% or 40% or more in a bear market collapse. And it can take as much as six or seven years for the value of your investments to recover. It is simple math. If the goal is to have your portfolio increase over time, you can’t afford to have the value of your portfolio go backwards.

Until now with our Beyond Buy & Hold system, investors had no other options to the standard “Buy & Hold” approach. Bear market declines only represent about 14% of the stock market’s trading cycles but those declines average out to annual losses of 39% per year. About 86% of the time, the stock market is rising at an average return rate of 15% per year. With a proven quantitative system like ours that is constantly on the lookout for bear market crashes, it makes sense to be 100% invested in the stock market most of the time. You want to be able to capture those 15% annual gains (86% of the time) and avoid those 39% annual losses (14% of the time).

Our system can’t totally avoid losses in those bear market declines but we avoid most of the losses. And while “Buy & Hold” investors have to wait an average of 4.5 years for the value of their portfolios to recover, our system recovers in less than a year. If you can benefit fully from the bull market runs and avoid the big losses in the bear market declines, you can almost double the performance of the market as a whole.

Happy Investing,

Phil

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Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.