Stock Valuation and More From Warren Buffett, Final Part

While Warren Buffet emphasizes stock valuation, he's not a one trick pony. He understands that there's more to successful investing then simply finding stocks at good values. We've been talking about some of his ideas, and today we'll finish up our discussion with:

• Understand what you own.
• Defense beats offense.

I like these two a lot. In many ways they're even more important that focusing on value. You don't have to be strictly a "value investor" to benefit from from these two points.

Don't underestimate the importance of understanding what you own. The fact is, most people don't. They have no idea what they're investing in.

Don't believe me? Do you have a brokerage account, or a 401k? You do? Okay, what's in it? mutual funds, ETF's, stocks, bonds. How much of each (i.e., what percent) is in the account? For example, what percent of your account is in stocks? (This includes individual stocks plus stocks and/or mutual funds.)

(When Buffet talks about understanding what you own, he's more referring to your knowledge of the specific company you own. We're extending this definition to include anything whatsoever you've invested your money in.)

We can't get into specifics of what you should know about a stock or a mutual fund, but here's a basic idea of what you've got to know about any investment you hold.

Why did you buy it? What will cause you to sell it? If you were going to decide today to buy it or not, would you buy it? If the answer is no, then why are you holding it in your account right now?

Anyway, I hope you get the point here.

As for "Defense beats offense," it warms my heart to see Buffet say this. I always try to explain why this is so important to clients. Some appreciate it, some don't. (Fortunately, most do!) But I hope you understand why this is so important.

Maybe the best way to show why this is so important is to remember what should be your #1 rule of investing: Avoid the Big Loss. You've really got to make this your #1 rule of investing. In fact, if you did make this your #1 rule, you'd be far ahead of the vast majority of investors.

In fact, most investors either don't understand this rule, or they don't think it's all that important.

Now, if you're still not sure this is all that important - or just didn't know about this #1 rule - you can use Warren Buffet as your authoritative source (not just me). You can let Mr. Buffet motivate you to place a big sign above your computer screen when you trade your account. Or you can send an e-mail to and call up your broker with this most important message: AVOID THE BIG LOSS!

Okay, we've gone through Warren Buffet's 7 Rules of Successful Investing. If you don't remember them, here they are again:

• Stay liquid.
• Buy when everyone else is selling.
• Don't buy when everyone else is buying.
• Value, value, value.
• Don't get suckered in by big growth stories.
• Understand what you own.
• Defense beats offense.

I hope you found this helpful in expanding on the all-important concept of "stock valuation." Keep these somewhere safe. You won't go wrong if you use them as guidelines.