I find it fascinating to study the most significant mistakes of well-known investors. It is very easy to put investors like Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) on a pedestal and think these billionaires have never made a single investing mistake in their entire career.
This couldn't be further from the truth. In reality, both Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) leaders (and every single other investor out there) has made mistakes in their careers, some more serious than others. By studying these mistakes, we can improve our own investment processes to ensure we don't make the same errors.
Even though he is considered to be the greatest investor of all the time, Buffett has made mistakes that have cost him tens of billions of dollars over his career. He outlined some of these mistakes in 1998 in a lecture at the University of Florida School of Business.
Buffett prefaced his discussion of mistakes, saying: "We have passed up things where we could have made billions and billions of dollars from things we understood, forget about things we don’t understand."
He then provided some examples:
"The fact I could have made billions of dollars from Microsoft (MSFT, Financial) doesn’t mean anything because I never could understand Microsoft. But if I can make billions out of health care stocks, then I should make it. And I didn’t when the Clinton health care program was proposed and they all went in the tank. We should have made a ton of money out of that because I could understand it. And didn’t make it."
This is the clear distinction that runs through the rest of the speech from the Oracle of Omaha. Buffett is perfectly happy to acknowledge he has made mistakes by not investing in something he did not understand. He also acknowledges that on some occasions, his inaction has also been a mistake:
"I should have made a ton of money out of Fannie Mae back the mid-1980s, but I didn’t do it. Those are billion dollar mistakes or multi-billion dollar mistakes that generally accepted accounting principles don’t pick up."
All of the errors above are mistakes you don't see. The mistakes outside investors do see cost more money, but in many respects, they are no worse than missed opportunities:
"The mistakes you see. I made a mistake when I bought U.S. Air Preferred some years ago. I had a lot of money around. I make mistakes when I get cash. Charlie tells me to go to a bar instead."
"The bigger mistakes are the ones of omission. Back when I had $10,000, I put $2,000 of it into a Sinclair Service Station, which I lost, so the opportunity cost on that money is about $6 billion right now-- fairly big mistakes. It makes me feel good when my Berkshire goes down, because the cost of my Sinclair Station goes down too. My 20% opportunity cost."
Inaction, and action for the sake of action. These seem to be the two main buckets of mistakes Buffett singles out, and they can tell us a lot. First, if you have cash, never invest for the sake of investing. Second, don't regret your mistakes. You'll only know if you missed out on a great investment opportunity once that opportunity has unfolded.
So don't beat yourself up about missing that multi-bagger stock. There will be other opportunities, opportunities you may understand better, which you buy into with a much higher conviction. Or as Buffett concludes his speech:
"We never look back. We just figure there is so much to look forward to that there is no sense thinking of what we might have done. It just doesn’t make any difference. You can only live life forward. You can learn something perhaps from the mistakes, but the big thing to do is to stick with the businesses you understand."
Disclosure: The author owns shares of Berkshire Hathaway.
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