Read an Excerpt
#20/101 REDUCES INVESTING MISTAKES
One of the greatest reasons to own Berkshire is the chairman helps you to reduce your investing mistakes.
The opportunity to misjudge an opportunity, to misunderstand an investment, to be overly optimistic, to buy high, to sell low, to choose the wrong asset class, to time the market, and to be risk adverse. To succumb to advertising, star ratings, Wall Street noise, momentum stocks, gurus, quick profits, new investment methods, technology, newsletters, insiders, the internet, your broker, your neighbor, your spouse.
When you are given the opportunity to manage your investments you are also given in proportion an equal opportunity to make mistakes. And many investing mistakes are legendary; i.e. Long Term Capital Management.
One of the biggest mistakes is to not know what mistakes are possible: To not know what you don't know.
Investors by nature are optimistic. So are golfers. No golfer will tee off on a ball thinking the ball is headed for a hazard. Avoiding the hazards is what success is all about.
Skiers don't think about hitting a tree. Drivers don't anticipate getting a speeding ticket. And it's usually another person's fault, including the police officer who is simply doing his job - or a broker who gave you a bad tip.
Human nature prevents us from hearing about investing mistakes from individuals or so called professional managers. We never hear about the water balls, the divots, the lost balls, the unrecorded swing and miss, the hazards.
The second biggest investing mistake is we conveniently forget to record our mistakes.
Most individual investors measure themselves in the short term and forget about the impact of taxes and trading costs. Individual investors don't seem to want to compare themselves to a meaningful benchmark, like the S&P Index. Individual investors usually operate under the feeling that they have had a pretty good year. Or they feel like they had a bad year. But according to what standard and to whom. Because individual investors don't have to be accountable to anyone but themselves, performance measurement is very haphazard and unprofessional. Investing mistakes are rampant and unrecorded. The brokerage houses add to the mistakes by not properly reporting costs versus market price, by not measuring annual rates of return by investment decision, or by not comparing investment returns with a comparable benchmark.
But professional money managers are worse. They purposely deceive by hiding their mistakes. One of the best deceptions is to fold unsuccessful mutual funds into successful funds thereby hiding the poor performance. About 90% of professional money managers do not successfully compare to the S&P Index. As a group they are better at advertising than managing money.
Mr. Buffett will be the first to highlight his mistakes. In fact his company, Berkshire Hathaway is named after one of his biggest investing mistakes, a textile mill in New England unable to sustain a profitable business.
So the very name of the company is a constant reminder to the chairman that mistakes are easy in this investing business. The idea is to reduce investing mistakes. And when you do make them, acknowledge them, learn by them - and don't repeat them.