Over the weekend, I re-read "Poor Charlie’s Almanack," and wrote an article about what I learned from Charlie Munger (Trades, Portfolio) and Ted Williams, which can be read here. While I was reading the book for the fourth time, I decided to focus my attention on the mistakes that Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) have made throughout their careers. I wanted to learn more about their mistakes because they are two of the most successful investors of all time. I do not want to repeat the same mistakes in my career, and I also wanted to share their knowledge with other investors so they would learn from their mistakes as well.
There are two types of mistakes that both Munger and Buffett have made during their careers.
1) Doing nothing, what Buffett calls “sucking my thumb.”
2) Buying with an eyedropper things we should be buying a lot of.
I then decided to review a YouTube video where Buffett gives a speech on investing and the biggest investment mistakes that he has made throughout his career. Beginning at 45:45, Buffett begins discussing his business mistakes.
“Well, the interesting thing about the mistakes is that, in investments, at least for me, and for my partner Charlie Munger (Trades, Portfolio), the biggest mistakes have not been mistakes of commission, they’ve been mistakes of omission, they’re where we knew enough about the business to do something, and for one reason or another, we sat there sucking our thumbs, instead of doing something.”
Buffett goes onto say,
“We passed up things where we could have made billions, and billions of dollars, from things that we understood, forget about the things that we don’t understand. The fact that I could make billions out of Microsoft doesn’t mean anything because I can never understand Microsoft. But if I can make billions out of healthcare stocks, then I should make it, and I didn’t. You know when the Clinton health care program was proposed, and they all went into the tank, we should have made a ton of money out of that because I could understand it, and I didn’t make it. I should've made a ton of money out of Fannie Mae, back in the mid 1980’s, because I understood it, and I didn’t do it. Those are billion dollar mistakes, or multi-billion dollar mistakes that generally accepted accounting principles don’t pick up.”
Then, starting at 46:30, Buffett describes his biggest mistake, where he had a lot of money lying around and decided to purchase stock of USAir. Buffett then laughs and says he now has an 800 number that he calls before he buys a stock in an airline.
After Buffett’s mistake with his purchase of USAir, the two partners came very close to losing all of their money. This is likely why Warren Buffett (Trades, Portfolio) writes in the forward to the third edition of "Poor Charlie's Almanack,"
“Seek a partner who will never second-guess you nor sulk when you make expensive mistakes."
Throughout Charlie Munger (Trades, Portfolio)'s and Warren Buffett (Trades, Portfolio)'s career, they have made mistakes, but they have been resiliant and were able to pick themselves back up, analyze their mistakes, and strove to not repeat them by creating mental models.
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