Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) vice chairman Charlie Munger (Trades, Portfolio) is one of the world’s most successful investors. However, not every one of his, or Berkshire’s, investments has been profitable.
For example, in the past two decades, the company has lost money on investments such as UK supermarket Tesco (TESO, Financial) and U.S. oil and gas company ConocoPhilips (COP, Financial). Even as recently as last year, their investments in the four major U.S. airlines turned out to be duds; they sold near the bottom of the market crash, and even if they had held on, these stocks are among the few that have not recovered to above their pre-Covid highs.
Additionally, they have, by their own admission, missed out on highly profitable investments by failing to take advantage of buying opportunities. For instance, they failed to capitalize on the stock market’s 33% crash in the first quarter of 2020 by holding vast amounts of cash instead of purchasing discounted shares. Since then, the stock market has almost doubled in price. This, and other acts of omission, have led to significant opportunity costs.
Making mistakes
Munger’s mistakes show that even the very best investors can sometimes apportion capital inefficiently. Common errors among all investors include using emotions rather than fundamentals when selecting stocks and failing to accurately assess a company’s financial strength or the size of its economic moat.
All investors can do is learn from their mistakes to improve their capacity to identify the most attractive risk/reward opportunities in the future. This process can take many years, if not decades, and may never ultimately be complete. However, as Munger once said:
"If you're going to be an investor, you're going to make some investments where you don't have all the experience you need. But if you keep trying to get a little better over time, you'll start to make investments that are virtually certain to have a good outcome. The keys are discipline, hard work, and practice. It's like playing golf - you have to work on it."
An evolving checklist
Munger’s words may not seem all that relevant at the present time. After all, many investors have experienced tremendous success in the current bull run. However, long-term investors are bound to make mistakes in apportioning their capital when events such as market corrections and crashes come along.
As such, it may be logical to use an investment checklist to implement Munger’s advice. It could be referred to when deciding whether to buy or sell a specific stock. Initially, it may have a relatively low number of items that must be checked in order to proceed with a course of action. However, over time, an investor’s checklist can increase in size and detail as they make a wider range of mistakes and seek to avoid them in the future.
A checklist may also help an investor to follow Munger’s advice in becoming more disciplined. Although judgment will inevitably be required in areas such as assessing the size of a firm’s economic moat, the process of going through specific considerations before buying or selling a stock may create a structure that reduces a reliance on emotion and promotes greater discipline.
Learning from mistakes
Of course, making mistakes can help to catalyze the learning process. Indeed, it could be argued that the most valuable lessons are the ones that are most costly, in terms of making losses, since they are more heavily seared into an investor’s mindset. As such, being willing to make mistakes in order to learn from them may be key to an investor’s ability to improve over the long run.
Ultimately, not even Charlie Munger (Trades, Portfolio) can obtain a 100% success rate on investments. However, seeking to continually improve via learning from mistakes could increase an investor’s ability to identify, and take advantage of, the most appealing risk/reward opportunities.
Also check out:
