Warren Buffet's Rules to Investing applied to Passive Income

A friend of mine asked me, what is the most important rule of passive income? I didn’t have an answer immediately for him.  While I did write a book on passive income, I don’t think I  have some single most important rule. 

One thing that did come to mind was a quote from Warren buffet: “The first rule of an investment is don't lose. And the second rule of an investment is don't forget the first rule. And that's all the rules there are.”

Building passive income is investing. Although, when building passive income you don’t always need to invest cash, sometimes it is an investment of time.   Building passive income in many ways like other types  of investing. 

So what does buffet mean by don’t lose?

Well I think there are ways to interpret that. The principle here is pretty straight forward. I don’t think anyone goes into an investment hoping it will lose money. I think the application of this principle does advocate a certain investment strategy and philosophy. 

My interpretation of Warren Buffet’s investment style is to invest in solid, cash producing companies. Buffet I think avoids hot stocks and trends and focuses on solid business fundamentals, and it is a strategy that has worked well for him. 

So when faced with a speculative investment, something like gold with a binary outcome, it is either worth money when you sell it or worthless. I think buffet generally would avoid something speculative like that. Apparently I’m only 50% right here. According to some sources, Buffet doesn’t invest in gold but does invest in silver. 

The reason given is that silver has more practical uses. In a way, that means, the investment is less a speculation on gold and rather a speculation on future economic conditions. Practical metals, and by that I mean metals that have uses beyond a “store of value”, often correlate strongly with overall economic outlook. (actually in looking at this data point, I’m a little more confused, it might not be that straightforward.Looking at this graph that I can’t share, I don’t see a strong relationship.

All of this is to say, focus your efforts on things that will make money. Statistically, you are average, so expect an average outcome when making an investment, both with time and money. To clarify that statement, if an investment promises outlandish returns, it probably is either extremely risky or an outright fraud. If you get caught up in these big promises you can lose sight of the big picture, or said another way, you are setting yourself up to lose. 

Likewise, with passive income investing, you might want to avoid putting a lot of cash into a system that doesn’t work for most people. Think about something like multi level marketing where only perhaps 1% of participants make money. I think you want to avoid putting time and money into a system that is unlikely to work.

I will also say though, not everything is about money. I have spent a ton of time recently working on a book, which I don’t expect to make a ton of money. That also said, the costs of the book are close to nothing. You know what they say, nothing ventured, nothing gained. Sometimes you might just spend time doing something you enjoy, and maybe there is some chance of money in the future. But when it comes to actually putting dollars down, I say, be like Warren Buffet, be shrewd and don’t speculate.