How to Avoid Major Losses in the Stock Market?

Warren Buffett’s three investment rules are:

1. Never lose money.

2. Never lose money.

3. Never forget the first two rules.

So, how can one never lose money?
The answer: Manage your stock portfolio like an index fund. This ensures you’ll never suffer permanent losses.

For example:

• The Dow Jones Index has risen for 129 years without losses.

• The S&P 500 has risen for 97 years without losses.

• China’s SZSE A50 Index has risen for 20 years without losses.

• The Kweichow Moutai Index has risen for 29 years without losses.

How to Avoid Major Losses?
"Never lose money" is the golden rule. Investors should focus not on how much they can earn, but on staying within a loss-proof investment framework.

For inexperienced investors, short-term stock surges may seem exciting, but making consistent profits is hard—the global stock market follows the "70% lose, 20% break even, 10% profit" rule.

Why Do Most Investors Lose Money?
Because they don’t manage portfolios like an index fund, habitually buy low-quality stocks, and exclude high-quality companies.

Pat Dorsey, in The Five Rules for Successful Stock Investing, lists 5 quantifiable standards for stock quality. Avoiding stocks that fail these rules minimizes "landmine" risks.

1. Avoid Small-Caps & IPOs

IPOs are rarely bargains—companies only go public when they can fetch high valuations. Most IPOs are young, unproven businesses with limited track records.
Avoid: Companies listed <10 years, market cap <$100B.

2. Avoid Consistently Unprofitable Companies

Unprofitable firms often hype "breakthrough" products (e.g., miracle drugs or revolutionary tech). But single-product companies usually fail.
Avoid: Unprofitable stocks. Focus on firms with consistent 20%+ earnings growth.

3. Avoid Negative Cash Flow Stocks

Fast-growing firms may report profits before generating cash. But negative operating cash flow forces debt/equity financing, increasing risk.
Avoid: Companies with negative cash flow per share.

4. Avoid Low ROE Stocks

Return on equity (ROE) is a key quality filter. If a company’s 10-year ROE is <20% for half the time, skip it.
Avoid: ROE <20%.

5. Avoid Overleveraged Companies

High debt (= debt-to-asset ratio >50%) risks bankruptcy during economic downturns.
Avoid: Companies with excessive leverage.

Summary: Stocks meeting all 5 criteria—especially industry leaders—carry minimal permanent loss risk.