How to Never Lose Money

Warren Buffett has two rules for investing:

1. Never lose money.
2. Never forget rule #1.

When I first read these two rules years ago, I don’t believe I honestly understood the magnitude of the simple lesson. My surface level understanding was to make smart investments where I had a reasonable likelihood of success over long periods of time. In other words, don’t speculate on stupid shit. You know the drill, dollar cost average into a low-cost index fund through the ups and downs of the market. Over time, your investments will prosper through dividends and price appreciation.

However, as I get older and more experienced as an investor, I’m finally starting to understand this advice goes much further than how we invest.

 

Over the last few days, I have watched in horror how Hurricane Harvey has destroyed the Houston area. I realized my family would be completely wiped out if this happened in my area. The majority of our income comes from a large portfolio of income properties. I do not have flood insurance on any of my properties for two reasons:

1. We are located in an area rated as “low risk” for flooding according to FEMA. Cleveland, Ohio is actually ranked as the second safest city in the country when it comes to natural disasters.
2. The cost of the insurance would reduce my return on investment and it would also reduce my monthly positive cashflow.

A few years ago, I actually called my insurance agent to add flood insurance to a few of our properties. He talked me out of it by reminding me that our risk was low and the premiums were high. He felt I would be wasting a great deal of money buying insurance I didn’t need.

When I used to have my full-time accounting job years ago, I paid for disability insurance to protect my family in the event that I became injured and couldn’t work. At that time, the majority of our income came from my paycheck. I protected this income with disability insurance even though it was expensive. I didn’t want my family to be wiped out if I got hurt and couldn’t work.

A massive storm my area would destroy our home AND 95% of our income.

The Washington Post published this story highlighting how 80% of those impacted by Harvey do not have flood insurance:

“I wish I had flood insurance now,” lamented Leroy Moore, a 58-year-old whose home filled with water.”

The obvious problem is that it’s too late for Mr. Moore and everyone else who didn’t have flood insurance.

If you were are one of the lucky ones not directly impacted by the storm, you still have time. We can and should learn from this and apply the lesson in our lives.

Study Buffett’s advice and you’ll see he’s not suggesting we maximize our return on investment, which has been my #1 rule. His advice really is to MINIMIZE RISK OF LOSS. His advice is to arrange your investments so you can always stay in the game. If you swing for a home run and miss, you’re out and the game is over. If you invest for maximum returns like I do and don’t properly insure your assets, you can lose the game very quickly.

By not getting flood insurance, I’m not following Buffett’s rule. I’m actually taking on extremely high-levels of risk. I’m one storm away from losing everything. This is simply foolish and I should know better.

As a smart investor, I should have flood insurance for a significant portion of our rental portfolio. This is not an ROI analysis. This is about saving our asses when things go badly. This is about staying in the game and protecting our families from significant loss.

My hope in writing this is to challenge you to think about your current situation.

Where do you have significant risk? Understand you may have significant risk in multiple areas and not even realize it.

This is a very important question and you should take time to think about it.  Protecting your family is significantly more important than saving a few bucks.

If you would like a good outline on how to prepare for a natural disaster, check out this article by my friend Caleb Jones. I’m implementing many of his ideas myself.

NOTE (1): Apparently the national flood insurance program is up for some type of congressional vote in September 2017. There have been threats that they may cancel the program. I obviously have no idea what will happen, but I’m hoping Hurricane Harvey forces the government to continue offering flood insurance.

NOTE (2): Another recommended article you might want to read is here and it highlights how moving away from the coasts doesn’t necessarily protect you from flooding.

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