Buffett’s Rule #1 is Impossible

Apr. 19, 2024

Rule #1?

Never lose money. 

Excellent! I want to do that.

There’s a problem, though.

Everything loses money.

Even trading systems that clearly beat Buffett’s returns over the long-term lose money.

Yikes.

At the same time, I get a lot of emails from people saying, “I’ve lost money for years. How can I start making profits?”

And, of course, I have systems I like. (I update those systems on my Performance Page every month.)

The problem? Those systems lose money sometimes.

If a person who’s been suffering starts trading a new system, there’s a decent chance that system will suffer a drawdown right away.

Which only makes things seem more bleak.

But all is not lost.

As long as we get our minds right.

For example, let’s take the most successful, most sacred way to invest that’s ever been invented: dollar cost averaging into an index fund like SPY.

Buffett would agree this system is sound. Millions of viewers on YouTube would say dollar cost averaging is the only way that ever works.

So here’s what that looks like.

Perfect System for Long-Term Investing

• Long Only Entry (because the market only goes up). Enter Long when price closes into Oversold. RSI length is 14 (default) and Oversold is 30 (default).
• Cash Needed: $30k for this example.
• Stoploss: None. It’s buy and hold until we hit the target.
• Target: $1000 total profit on all positions.
• Position Size: $10,000 of SPY each time.
• Maximum # of Re-Buys: 3
• Re-Buy: Every time RSI crosses under the Oversold threshold. (It has to come out and go back down to qualify.)

Here are some sample trades:

In the late part of 2023, SPY moved into Oversold and we bought $10k worth of stock. It rose and fell more, and went into Oversold again. So we bought $10k more. Then SPY went up and we exited with a $1,000 profit.

Dollar cost averaging is the best.

Here’s the incredible Equity Curve since the 1990s:

And here’s the Report:

Amazing Profit Factor and, remember, drawdown is irrelevant because it’s time in the market that counts (and we’re never selling a losing position).

Case closed?

Well, there’s one tiny obstacle.

Remember Buffett’s #1 rule about not losing money?

Using this system, we would have taken a position in 2007 and we wouldn’t have gotten any profit until 2012.

We’re not supposed to lose money and buying and holding loses money for half a decade!

That’s what the best, and most recommended, system of all time gets us: five years of losing money.

Do we get out in profit in the end?

Yes.

Does that make losing money for that long okay?

Um…

There is no way to not lose money. Of all the helpful things Buffett has said, this is at the bottom of the list.

Everything loses money.

Once we know that, we can reframe our thinking.

We can know that dollar cost averaging will go through very long losing periods, and be okay with that.

Or we can use a portfolio of systems (like the free one on the Performance Page) and cut that losing period down to one year.

Or even less.

But there’s no way to follow Rule #1.

It’s impossible.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.