The most famous investor that even those who couldn’t care less about the stock market have probably heard of is Warren Buffett. The noted Nebraskan is one of the wealthiest individuals in the world and heads up Berkshire Hathaway. While he is celebrated for the billions he’s made, maybe the greatest lesson comes from the billions he’s lost. If he can make bad investment decisions, so will you and I.
In the early 1990s, he invested in a shoe company that he believed “needs no fixing” and was “one of the best managed companies [he and his partner Charlie Munger had] seen”.1 As the decade continued, the investment went sour, and ultimately cost his company billions of dollars.
What makes him one of the great sages of investment management is not only his successes, but that he owns up to his failures. One researcher pointed out that the word ‘mistake’ has appeared 163 times in his popular annual letters.2 Overconfidence was replaced by humility.
Even the best of us makes mistakes in our areas of expertise. Plan for it. Don’t just invest in what you are confident in. Make room in your portfolio for holdings that don’t necessarily fit the economic narrative that you are most convinced of.
Maybe you are aggressive by nature. You tend to want to chase the hottest IPO on Wall Street. Check that aggressiveness with also investing in more conservative stalwart companies or fixed income.
On the other hand, you might be more temperamentally conservative. You have little appetite for risk at all. You tend to think the world is going to you-know-what in a hand basket. Like tomorrow! What if you’re wrong? You might want to add investments in companies oriented toward future growth.
Learn from Buffet’s example: what we think might happen doesn’t always happen. Hold your investment confidences humbly. Admit your fallibility and develop an investment plan that owns up to it with a portfolio that illustrates it.
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Sources:
1. Quoted by Michael Batnick, Big Mistakes: The Best Investors and Their Worst Investments, 80.
2. Batnick, 82.