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2 Important Lessons 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.

In an earlier article, I wrote about a lesson Buffett had absorbed after committing the folly of buying cheap-looking businesses. The lesson was to stick with easy businesses. In this article, I want to look at an aspect about the business and investing world that Buffett picked up in his earlier years as an investor. [Editor’s note: An article on another lesson Buffett had learnt from his mistakes has been published. It can be found here.]

A key lesson: The invisible but important “institutional imperative”

Buffett wrote that businesses are often subjected to an unseen force called the “institutional imperative.” This imperative shows up in a few ways.

For instance, managers in a company are usually reluctant to make any changes in its current direction. This could mean that the company may not be keeping pace with changes in its business environment, in turn, leading to its downfall.

In another instance, whenever a company has excess funds, new corporate projects or acquisitions would magically appear to soak up the funds. In yet another example, the decisions made by a company’s leader – however misguided – would be quickly supported by detailed calculations and studies by his followers. A final example Buffett shared is that the behaviour of peer companies is often followed blindly.

Buffett added: “Institutional dynamics, not venality or stupidity, set businesses on these courses, which are too often misguided.” Buffett also pointed out that he had made early and expensive mistakes due to him ignoring the institutional imperative. So, when investing,  it is important to identify the rare managers who are forward looking and not afraid to make tough decisions. A company’s management can well determine its fate.

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