In 2021, at the Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual shareholder meeting, the Oracle of Omaha, Warren Buffett (Trades, Portfolio), made what some might call a shocking statement. He declared that investing is hard, and most investors will not make money by picking stocks.
This might be shocking because it comes from the world's most successful investor, who has made hundreds of billions of dollars for his investors by investing in securities.
However, what investors need to understand is the fact that just because Buffett has been able to achieve these returns does not necessarily mean that it was an easy feat, even from his viewpoint.
Buffett on the problems of investing
The Oracle said the following at the 2021 annual meeting:
“I do not think the average person can pick stocks… I would like particularly new entrants to the stock market to ponder just a bit before they try and do 30 or 40 trades a day in order to profit from what looks like a very easy game.”
I think this is an important statement not just for new investors but for seasoned investors as well.
One of the most dangerous qualities an investor can have is overconfidence. If we are overconfident in our own abilities, we can end up making mistakes. Humility is vital in investing. It is vital to acknowledge that we are never going to have all of the information required about a particular investment opportunity and it is vital to ensure that a margin of safety is built into all fair value calculations as a hedge against what we don’t know.
The second we start being overconfident and assuming we know everything, the chances of making a mistake start to grow. This is why I believe it is vital for all investors to keep Buffett’s advice in our minds.
Investing is hard. That is never going to change. Even if we get lucky on a few opportunities, there is no guarantee that the run of luck will continue. And yes, I am using the word luck here because luck plays such an important part in investing. Even if we do all the hard work and find a company that hits all of our value requirements, there is never any guarantee the stock will increase in value.
There is also no guarantee we will know everything there is to know about the business. Management could be hiding fraud, there could be a black swan even, the market conditions could change, new tech could disrupt everthing, and so on. Avoiding these disasters is just as much about luck as it is about skill. This is something Buffett has admitted himself.
In 2021, Buffett illustrated his point by showing a list of the largest companies in the world in 1989. Of the 20 stocks highlighted, every single one had dropped out of the list by 2021.
“It's a reminder of what extraordinary things can happen,” Buffett said. “We were just as sure of ourselves, and Wall Street was, in 1989 as we are today. But the world can change in very, very dramatic ways.”
This illustrates why there is more to investing than just picking and holding the best stocks on the market. There’s an element of luck as well as skill involved in buying and holding the right companies.
Unfortunately, most investors just do not have the emotional intelligence required to ride out the peaks and troughs of market volatility and question their own ideas (that’s without even taking luck into account). Beginners need to be sure they are in the right place before getting involved with individual stocks and shares.
Meanwhile, those investors with more experience need to keep on their toes, remember that the world can change at any minute and be prepared to change direction simultaneously. If investing was as easy as Buffett makes it look, every investor would be a billionaire.
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