-Warren Buffett on the Two Biggest Rules of Investing

Rule No. 1:

“Never Lose Money”

Rule No.2:

“Never Forget Rule No.1”

Last Thursday the Federal Reserve raised the Fed Funds rate for the seventeenth time to 5.25%.  In addition to raising rates, the Fed’s commentary that accompanied the rate increase sparked a massive stock market rally. The comments were prompted by the Fed’s view that the economy is slowing. On the surface, an increase in interest rates is a negative for the market, but any negativism was more than off-set by the Fed’s comments. The DJIA exploded up over 200 points. Our other stock market indexes followed in a similar fashion. This appears to be a period when the market could do well. As a result we are fully invested.

-Warren Buffett on the Two Biggest Rules of Investing

Rule No. 1:

“Never Lose Money”

Rule No.2:

“Never Forget Rule No.1”

Meanwhile we will enjoy the profits in the financial markets as they occur.

A recent headline in the Phoenix newspaper said, “Fear Grips Phoenix Housing Market.” The concern in Phoenix is a concern everywhere as people worry about how they’re going to pay their debts. One report says that nearly $1 trillion in adjustable rate mortgages (ARMs) will be adjusting their interest rates and payments to mortgage holders in the next twelve months. If that isn’t enough we also read about 1/3 of the entire U.S. debt will refinance in the next year. That would be like $2.8 trillion. For individuals, how does that affect their budgets and where do they get the money to make the additional payments. Funds have been coming from credit cards and housing refinances but with credit cards maxed and a housing boom slowed, where will it come from now? For government, it means higher interest payments from cash they don’t have and will have to be created. More cash being created ads to inflation. More inflation means higher interest rates according to Ben Bernanke, the Federal Reserve chairman. Seems like a vicious cycle, doesn’t it? How long will foreign country investors continue to buy our government debt as it approaches nine trillion dollars? We have become the largest debtor nation in the world in history.

-Warren Buffett on the Two Biggest Rules of Investing

Rule No. 1:

“Never Lose Money”

Rule No.2:

“Never Forget Rule No.1”

Clients have asked why we sold out of the market on May 12 and when will we get back in.  The simple answer is we are invested when the market looks healthy and out when it’s not.

A healthy market is one where small caps (small company stocks) out perform large caps (large company stocks).  That was not the case since the beginning of May.  So when we saw the market start to tumble it was a natural time for us to exit.  As to when to re-enter let’s look what has recently occurred.

This past week I saw a euphemism that, given what the stock market has done over the last several weeks, seemed very appropriate. It went like this: “Noah built the ark before it started raining.”

We are nearly six months deep into 2006 and over the past three weeks we have seen the gains accrued since January all but vanish. Now for the $64,000 question…did you have your ark built before it started raining? I hate to be an “I told you so”….but I can’t resist. Now for the next bit of investment prophesy…. The market could likely rally before long and test or maybe even set new highs. About the time most investors get comfortable again…the rains will come. If, by that time, you haven’t built your ark you won’t have anyone to blame but yourself.