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Stepan Lavrouk
Stepan Lavrouk
Articles (506) 

Charlie Munger: Berkshire Hathaway’s Biggest Mistakes

The biggest mistakes are mistakes of omission

June 02, 2020 | About:

With close to 150 years of combined experience in the financial markets, it’s perhaps unsurprising that Charlie Munger (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) have made their fair share of mistakes. What is perhaps more surprising is their attitude towards their mistakes.

At the 2001 Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) annual investor conference, Munger was asked to comment on what he considers the biggest mistakes of his career to be. Here’s a summary of his response.

Errors of omission

In Munger’s estimation, Berkshire’s biggest investing mistakes have been those of omission rather than commission. In other words, Munger regrets the things that he did not do rather than the things he did do, even though the consequences of these omissions do not show up in any annual report.

He believes that investors in general are not concerned enough about opportunity costs. Any time someone makes a decision, they are necessarily closing off other avenues that they might have taken. Munger provided an example from his own career:

“What really costs are the blown opportunities. When I was somewhat younger, I was offered 300 shares of Belridge Oil. Any idiot could have told you there was no possibility of losing money, and a large possibility of making money. I bought it, the guy called me three days later and offered me 1,500 more shares. This time I had to sell something to buy the d*** thing [which Munger did not end up doing] - that mistake, if you trace it through, has cost me $200 million! And all because I had to go through slight inconvenience of having to sell something.”

Munger said that Berkshire has had a number of these kinds of missed opportunities, where in retrospect it is obvious that they should have pounced when they had the chance.

What does it mean to make a mistake?

However, Buffett was quick to add that for Berkshire, an "error of omission" can only occur with something that lies within your circle of competence. So, for instance, he does not consider not investing in Amazon (NASDAQ:AMZN) or Google (NASDAQ:GOOG) in the early 2000s to be a mistake because he and Munger never claimed to have any experience in, or knowledge of, the technology sector.

Herein lies an important lesson for all investors: you can’t beat yourself up for missing a trend or opportunity in an area where you have no edge. In fact, doing so will only create the temptation to step outside your circle of competence in the future. How many people who missed out on Amazon decided they would “get on the next big thing,” only to have the air rush out of whatever investment fad they decided to hitch their wagon to? Always focus on the things that you know, and don’t worry about the things you don’t.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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