Warren Buffett. Bill Pugliano / Getty
Warren Buffett likened reckless borrowing to Russian roulette.
Berkshire Hathaway CEO John Berkshire said that he wouldn't gamble with his company to win more money.
Buffett stated that people shouldn't put their reputation and wealth at risk for the cash they don't use.
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Warren Buffett is known for saying that the first rule in investing is to not lose money. Buffett, a billionaire investor who is also the Berkshire Hathaway CEO, has lived by this principle all his life. He even compared reckless trading and aggressive borrowing to gambling.
Buffett stated in his 2014 letter of support that it was insane to lose what you want in pursuit of what you just desire. "We will not play financial Russian Roulette with the funds that you have entrusted to me, even though the metaphorical gun contains 100 chambers and one bullet.
He continued, saying Buffett has a conservative approach to Berkshire finances in order to be ready for disaster. He explained that while reducing borrowing does not mean reducing the company's debt, it can also help to avoid financial disasters such as credit loss or financial fatality.
He stated in his 2018 letter that a Russian-roulette equation, which is a formula where a person gets a share of the company's upside and not its downside, may be financially sound. Berkshire would not be able to implement such a strategy.
The same analogy was used by Buffett during Berkshire’s 1999 annual shareholder meeting. Long-Term Capital Management was a high-profile hedge fund that had just fallen under a mountainof derivatives and debt.
Buffett stated that it was like playing Russian Roulette. Buffett spoke out about people who risk their reputation and wealth in order to make money they don’t need. "If I give you a revolver that has six chambers and one cartridge, you will say, "Pull it once for a Million Dollars," and I will reply, "No." "If you give me a revolver with six chambers and one bullet, I will say, Pull it once for a million dollars'. Then you'll ask, 'What's your price? There is no price."
Buffett stated that even the richest people shouldn't be afraid of failure or embarrassment, no matter how large. He said that they shouldn't place bets on the farm, even if there is a 99 percent chance of success. He also noted that the probability of winning a round with Russian Roulette using a six-chamber revolver with one bullet is solid 83.3%.
He stated that neither 83.3% nor 99% are good enough when there's no gain to offset loss.
Buffett emphasized his views in a 2018 interview with CNBC. Buffett stated that people only place leveraged bets in an effort to make quick money. They run the risk of going bankrupt and causing financial ruin for their families.
He also shared his reaction to someone telling him that they had made a comeback and become wealthy again. "I'm not impressed because they lost their first fortune."
Continue reading: William Green, author of 'Richer Wiser Happier', breaks down the 3 traits that have helped Warren Buffett achieve his success and explains why it's so important for investors