3 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 many 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 two earlier articles, I wrote about two lessons Buffett had absorbed after committing the folly of buying cheap-looking businesses. The lessons are:

1. Stick with easy businesses

2. The presence of the institutional imperative

In this article, I want to look at another lesson Buffett had learnt.

Trusting only the trustworthy

Buffett learnt from years of making business deals and investing that he should only partner with trustworthy people. Buffett wrote:

“After some other mistakes, I learned to go into business only with people whom I like, trust, and admire.”

But it’s not enough to go into simply any business that is run by people who possess both capability and integrity. The type of business matters too. Buffett explained:

“A second-class textile or department-store company won’t prosper simply because its managers are men that you would be pleased to see your daughter marry. However, an owner – or investor – can accomplish wonders if he manages to associate himself with such people in businesses that possess decent economic characteristics.”

For stock market investors, what this goes to show is that, apart from ensuring that a company is in the right industry and business, it is also equally important that a company has the right management team. When a business with good economic characteristics is paired with a good management team, the probability of success with the investment increases significantly.

But, Buffett also stated:

“Conversely, we do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We’ve never succeeded in making a good deal with a bad person.”

When investing, it pays to study the character and ability of a company’s management team. A great business that is paired with questionable management could lead to pain for investors down the road.

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