Warren Buffett’s Investing Mistakes: Part 3

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 is the third of a few articles that looks at the mistakes Buffett detailed in his 1989 letter. The first and second articles can be found here and here. [Editor’s note: A fourth article on Buffett’s mistakes has been published. It can be found here.]

A big mistake: Not investing

I personally find this mistake of Buffett’s to be very relevant to every investor.

Buffett claims that many of his worst mistakes are unknown to the public. What he’s referring to are the investment opportunities available to him that he did not act on. This is a common mistake many investors make, and we can see that even the best investors commit them too.

Buffett wrote:

“Some of my worst mistakes were not publicly visible. These were stock, and business purchases whose virtues I understood and yet didn’t make. It’s no sin to miss a great opportunity outside one’s area of competence. But I have passed on a couple of big purchases that were served up to me on a platter and that I was fully capable of understanding. For Berkshire’s shareholders, myself included, the cost of this thumb-sucking has been huge.”

The mistake Buffett wrote about in the quote above brings to attention two important points.

Firstly, if you aren’t competent in a particular area, then you shouldn’t be investing in such companies. Even if it’s a good opportunity, investing outside your area of competence often leads to decisions that are made with inadequate information or understanding. This puts you in a position of discomfort because you must constantly must worry about the investment.

Secondly, if you are competent in an area, you should act decisively. Your area of competence should be a strength that allows you to make tough decisions when the market is acting up.

Being able to act decisively in areas you know is important to ensure investing success, because if you are missing great opportunities within your circle of competence, then it becomes hard to find suitable investments. Over time, it can be detrimental to your returns.

Buffett’s mistake of omission teaches us that we should be confident about the knowledge we have, and be ready to apply it when necessary. If this is done consistently over a long time, decent returns can be expected.

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