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An Important Lesson Warren Buffett Learnt From His Investing Mistakes

Warren Buffett’s track record makes him one of the investing community’s all-time greats. From 1965 to 2016, he generated an incredible annual return of 19%. But you may be surprised to know that even Buffett makes mistakes.

In Buffett’s 1989 letter to his shareholders, he shared a number of investing mistakes he committed in his first 25 years of investing and the lessons he learnt from them. It’s always valuable to pick up wisdom from others, and it’s even more so when we can learn from Buffett, given his stature.

This article will focus on one particular lesson Buffett had absorbed after committing the folly of buying cheap-looking businesses. [Editor’s note: Two articles on two lessons Buffett had learnt from his mistakes have been published. They can be found here and here.]

Investing lesson: Stick with the easy

After Buffett realised his mistake, he realised that “easy does it.” He further explained that he and his business partner Charlie Munger have learnt that solving difficult business problems is indeed tough. As such, companies trying to do just that should be avoided. Buffett added:

“To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers”.

What the quote above tells us is that if a company is facing a highly complex and/or difficult business-problem, it is better to stay away from it. Businesses trying to solve difficult problems may take a long time before they can return to satisfactory profitability. This means that the years required before any substantial return is seen may be high.

What Buffett recommends is to keep things simple. He wrote:

“The finding may seem unfair, but in both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult”.

Simple is good when it comes to investing. This is because investors can also more easily understand a company that’s facing a simple problem, and thus value it with higher confidence. “Overall, however, we’ve done better by avoiding dragons than by slaying them,” Buffett wrote.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.