A few weeks ago, I discussed Warren Buffett (Trades, Portfolio)'s mistakes, and what investors could learn from these small, but not catastrophic, losses.
The unfortunate fact of the matter is, every investor will make plenty of mistakes over their lifetime, you have just to make sure these mistakes are not terminal. Learning from your mistakes will only make you a better investor over time.
To put it another way, as long as the mistakes you make are not terminal, and you live to fight another day, they won't kill you and should make you a better investor. It is not making mistakes that will put an end to your investment career; it is how you react after making them.
Look forward, not back
If you try to look for revenge against the market (investing everything in penny stocks, for example, to try and generate the best return for the lowest capital outlay), you could end up compounding your original mistake and doing lasting damage to your portfolio. The best approach is to learn from your mistakes and move on.
This is precisely the advice Buffett gave to students at the University of Nebraska in 1994. The guru attended the university before going on to Columbia University, where he studied under Benjamin Graham. After a short introduction and lecture, he went on to answer students' questions.
One student asked: Mr. Buffett, how did you first get started and how did you deal with failure, if you had one? He responded:
"How did I first get started? It depends. I bought my first stock when I was 11, but I'd been thinking about them for a long time before that. My dad was in the investment business, and I used to go down to his office in the old Omaha National Bank building when I was seven or eight years old. I found out I was near-sighted because I couldn't read the quotations up on the stock board; otherwise, I might have gone through life without glasses. I just got very interested in it. I started reading books on it when I was eight or nine, and then I finally saved enough money to buy three shares of Cities Service preferred for $114 in 1942, and then I just kept doing it.
Failure depends on how you define it. A lot of things go wrong in life, but that doesn't necessarily mean that they're failures. I really don't look back. I try to learn from what I see around me, but I don't try to learn by going back over this decision or that decision or what did I do wrong or the sort. I don't think about that at all. You can make a lot of mistakes. The nice thing about it is you're going to make a lot of mistakes and still do very well. That's the encouraging thing. I write about my mistakes in the report. In fact, I have a section sometimes called 'mistake du jour' and unfortunately it's plural most years, too. It's not the end of the world. You don't want to make any ones that are fatal. You do not want to own securities on borrowed money because that can wipe you out. I've never borrowed money of any significant amount because I just didn't want to go back to go. Borrowed money can magnify your mistakes, and it may magnify them to the point where they wipe you out. But, there's nothing wrong with making mistakes. You should try to pick things that you understand. That is the key to what I do. Occasionally I may make a mistake when I think I understand something I don't. Another mistake that you don't see is when I pass up something that I'm capable of understanding. Those are mistakes of omission and sometimes they have been huge. I could point to mistakes like that which have cost us over a billion dollars. I knew enough to do something but for one reason or another, I didn't. Fortunately, people don't see those."
Mistakes are just a part of investing. Even Buffett has made some throughout his career, but he's limited the damage of these missteps by staying away from borrowing and not looking back -- important advice for every investor.
Disclosure: The author owns no stocks mentioned.
